Supply Chain Management: Pre-Read

Supply Chain Management
Pre-Read
SUPPLY CHAIN MANAGEMENT
Compiled by
Aslam Soni
Compiled by Aslam Soni, CSCP, PMP Page 1

What is Supply Chain Management?

Supply Chain Management Definition:
Let us first understand What is Supply Chain Management? A supply chain is a global network
used to deliver products and services from raw materials to end customers through an engineered
flow of information, physical distribution, and cash. A supply chain, in view of the above supply
chain management definition, comprises a network of both entities and processes (the engineered
flow). A supply chain doesn't have to be global, but the massive chains that interest us in this course
-the ones that run through corporations such as Wal-Mart, Mitsubishi, Dell, and the clothing chain
Zara - are decidedly global in scope.
Figure below illustrates a very basic supply chain (one that is not necessarily global) with three
entities--a producer with one supplier and one customer.
What is Supply Chain Management? Its Basics and Introduction:
Three ―entities‖ that perform the processes can be business or governmental organizations or (at
least in theory) individuals. They can also be departments or functional areas or individuals within a
larger organization; there are internal as well as external supply chains. For the most part the model
applies to corporations. Most work on supply chains, both theoretical and applied, involves a
manufacturing firm in the middle (although service firms also have supply chains) with a supplier of
materials or components on the upstream side and a customer on the downstream side. As per

the supply chain management definition and speaking technically, a supply chain needs only those
three entities to exist. But that isn't realistic for the types of global supply chains of interest in this
course.
To understand what is supply chain management? we have simplified the concept in a figure. It might
be made up of these organizations:
 A supplier, a provider of goods or services or a seller with whom the buyer does business, as opposed to
a vendor, which is a generic term referring to all sellers in the marketplace. The supplier provides
materials, energy, services, or components for use in producing a product or service. These could
include items as diverse as sugar cane, fruit, industrial metals, roofing nails, electric wiring, fabric,
computer chips, aircraft turbines, natural gas, electrical power, or transportation services.
 A producer that receives services, materials, supplies, energy, and components to use in creating
finished products, such as dress shirts, packaged dinners, air-planes, electric power, legal counsel, or
guided tours. (Note that supply chain management for services may be more abstract than those for
manufacturing).
 A customer that receives shipments of finished products to deliver to its customers, who wear the shirts,
eat the packaged dinners, fly the planes, or turn on the lights.
Introduction to Supply Chain Management Structures
An organization‘s supply chain management or network can have many forms. It can be a simple
chain structure with a single strand, as shown in Figure 1-1, a complex network, or any structure
between those two extremes. No matter whether it is a product or service chain, or what types of
entities are involved, companies require their supply chain to guarantee a steady flow of supply while

at the same time striving to reduce their supply chain costs. They can improve operating efficiency by
employing the right supply chain management structure.
Depending upon the type of industry, supply chain costs can be as high as 50% of a company‘s
revenues. According to research done by A. T. Kearney, a global consulting firm, inefficiencies in the
supply chain can total 25% of a firm‘s operating costs. When a company is faced with thin profit
margins, like 3% to 4%, even a small improvement in efficiency can double profitability.
Implementing the appropriate cost-centered structure and strategy is critical.
There are three main types of supply chain strategies: stable, reactive, and efficient reactive. The
stable supply chain strategy is appropriate for chains:
 With a significant history of stability between demand and supply.

 That are focused on execution, efficiencies, and cost performance.
 That use simple connectivity technologies and have little need for real-time information.
What is Supply Chain Management? - Understanding Using an

Example:
Consider, as a very simplified instance of this stripped-down supply chain model, a young street
vendor who sells just a few light snacks. This is a familiar sight on warm summer days around the
globe, whether it is fresh crepes in Paris, roasted chestnuts in New York, or small servings of spicy
tapas in South America. In many ways, the food vendor on the street resembles small family
businesses that exist in cities all across the world.
This simple street vendor represents one end of a supply chain. The supplier is probably a small
wholesale food distributor that sells basic ingredients to many one- or two-person food kiosks. The
worker is the ―producer‖ who turns the raw ingredients into crepes, roasted nut mixes, or a variety of
easy-to-cat tapas. The stand, operated by one or two owners, is the retailer that sells the finished
delicacies to the customers or passes by who are cajoled into making a purchase.
Notice that even in this simplest of supply chains, the basic model needs amplification. For instance,
there are more suppliers than one. While flour and nuts may be procured from the same supplier,
water to warm the stainless steel food containers comes from the employee‘s kitchen facet, and the
supplier of that water may actually be a government entity rather than another business. Electricity is
supplied to light this mini ―manufacturing center.‖ Nearby is a food preparation area with
refrigeration for storing the perishables needed plus shelves and drawers to hold various basic
supplies, such as tongs and other utensils. There is also wood to build the stand and a white board
and markers for making signs to advertise the day‘s offerings. Somewhere in the chain, though they
remain invisible in our model, are suppliers‘ suppliers, who bring materials, components, or services
to the food wholesaler and the utility companies.

What is Supply Chain Management? - in Manufacturing:
Discussions of supply chains typically put manufacturing at the center and suppliers of components
to the immediate left. It may be that component suppliers are the most crucial consideration when
designing and managing a supply chain management for manufactured products, but utilities and
other services are not inconsequential contributors to the cost of operations.
In the case of our food vendor on the street, services most obviously include utilities, transportation,
warehousing, carpentry, and cleanup, among others. Utilities, which are suppliers to all
manufacturers, are crucial considerations when locating plants and warehouses. If water and
electricity (or natural gas, or both) are not available at a proposed site, they cannot be readily made
available.
Tier 1 suppliers have their own suppliers in Tier 2. The wholesale food distributor that supplies the
daily ingredients and raw materials for the menu items has its material and service suppliers—and
they have their suppliers, and so forth. The flour for the crepes, for instance, is not a raw material but
a product with its own supply chain management that begins in a farmer‘s wheat field and is
processed in a plant, shipped to a wholesaler, and distributed to the corner store. No matter how far
you travel toward the left, you will never run out of new tiers of suppliers.
Even a raw material extractor, such as a coal mine, has its own suppliers of extraction machinery and
services. In fact, the coal mine may ship coal to a generating plant that supplies power to the
manufacturer that produces a machine that is shipped to a distributor that sells mining equipment to
the same mine that began the process; supply chains can double back on themselves. (A distributor
is a business that does not manufacture its own products but purchases and resells these products.)
What is Supply Chain Management ?- In Services
Although the traditional supply chain management model was developed in manufacturing, the
service industry, too, has supply chains. According to the A PICS Dictionary, 13th edition, a firm in the
service industry is ―in its narrowest sense, an organization that provides an intangible product such
as medical or legal advice.‖ It may also be derived from supply chain management definition. In its
broadest sense, service industries include ―all organizations except farming, mining, and
manufacturing. It includes retail trade; wholesale trade; transportation and utilities; finance,
insurance, and real estate; construction; professional, personal, and social services; and local, state,
and federal governments.‖
Service-oriented supply chains also require sophisticated management. The supply chain of an
electric utility. It receives products, services, and supplies of its own and dispenses its services into
three distribution channels: home customers, commercial customers, and other utilities.

The flows in our street vendor example aren‘t quite as simple as might be supposed, either. The
―products‖ that move through the chain could include materials, supplies, and the components used
in the production of the menu items. Information flows may be fairly rudimentary orders submitted
by end users (caters) of the product, by the distributor (the person on the street with the cart) to the
manufacturer (the person who assembles the ingredients), and by the manufacturer to the supplier
(the source of the food). There will be recipes and shopping lists, discussions of potential demand,
perhaps records of last year‘s results. The flows of cash may be based upon information contained in
cash register or credit card receipts.
Cash travels in several separate flows from the manufacturer to suppliers of products and services
and, of course, to any lenders or investors for debt or dividend payments. There are also logistics
concerns: transportation from one entity to the other - perhaps drawing upon the private fleet of a
car or two - as well as the warehousing decisions. And, finally, the reverse supply chain management
- you‘ll read more about that later - exists to return any unacceptable menu items, to recycle the
vegetable waste into a composter, to reuse utensils and other supplies after sterile cleansing, and to
dispose responsibly of any packaging.
Many global businesses began in someone‘s home office, garage, or basement with the glimmering
of an idea for, let us say, a computer operating system or a new idea for consumer-to-consumer e-
commerce. Perhaps the food vendor comes up with a new twist on the old recipe for crepes; a
customer is impressed and asks if the vendor can make 50 crepes for a lunch-time birthday
celebration at his nearby office; someone at the birthday lunch owns a neighborhood
restaurant...and before long the vendor has rented space in a small commercial kitchen facility to
supply special made-to-order crepes for local businesses within a few blocks. It‘s surprising how
many challenges and opportunities can be anticipated and can be seen most easily in a very simple
model.
Summing Up the Concept of Supply Chain Management
There are many variations on the basic supply chain management concepts and models presented so
far. Here are some basic points to keep in mind as the discussion continues and grows more
complex.
 A supply chain involves, directly or indirectly, everyone and everything required to extract materials,
transform them into a product, and sell the product to a user.
 Supply chains include various entities, such as raw material extractors, service and component
suppliers, a material product manufacturer or a producer of services, distributors, and end customers.
 Supply chain management structures vary based on demand history, business focus, and needs for
connectivity, technology, and equipment.
 Supply chains can be viewed in terms of processes, such as the gathering and processing of marketing
data, distribution and payment of invoices, processing and shipping of materials, scheduling, fulfillment
of orders, and so forth. Such functions cut across entities.

 Supply chains include various flows as well as various entities. Materials and services flow from
suppliers toward customers; payment flows from customers toward suppliers; information flows both
ways. Supply chains also run in reverse, starting with the customer who sends back such items as
components for replacement or repair, returned goods for re-manufacture, and obsolete goods for
recycling or disposal. The reverse chain, like the forward chain, also comprises information flows and
cash or credits.
Supply chain management expertise is so important in today‘s business world that an annual survey
is conducted to identify the 25 best supply chain leaders based on specific criteria. It‘s a major
accomplishment to be named to that list and an even higher compliment when a company manages
to remain in that top echelon of supply chain performers for consecutive years. Check the online
Resource Center for a link to those survey results and to see which companies are top-ranked for
their supply chain management expertise.
Note: This lecture explaining what is supply chain management?, is taken from the series of lectures
designed for the Supply Chain Management Certification, Diploma in Supply Chain
Management and Supply Chain Management Degree programs. These programs are globally
recognized in the SCM industry and they are offered by the Academy for International Modern
Studies in UK - through 100% online and interactive learning system.

What is Value Chain?
Value Chain Definition:
Let us start this topic with the understanding of What is Value Chain? A value chain is a set of
activities that a firm operating in a specific industry performs in order to deliver a valuable product or
service for the market, and also defined as "A high-level model of how businesses receive raw
materials as input, add value to the raw materials through various processes, and sell finished
products to customers". Aside from the Value Chain Definition, there are some other aspects of
supply chain management that should be highlighted at this time.
 Supply chain management is about creating net value. Early efforts at managing chains often focused
only on cost reduction - on making the chain leaner. Unfortunately, these efforts sometimes reduced
the ability to create value more than they reduced costs, for a net negative effect. As we‟ll see, there‟s
more to creating value through intelligent management than simply squeezing costs out of one or
another activity in the chain.
 There should be value-creating activities in the supply chain that transcend the activities of particular
entities in the chain. Supply chains are generally organized by one strong firm called a channel master
or nucleus firm—often a manufacturer, sometimes a powerful retailer, which often manages those
activities. Nevertheless, the chain has to produce value for more than one stakeholder in addition to
generating value for the consumers or investors.
 Managing supply chains requires a balancing act among competing interests. Given the complicated
nature of group dynamics, this can be a challenging task, especially in “worldwide” chains. Consider the
rivalries that arise among and between the 50 American states, the 25 nations in the European Union,
the various sects of any world religion, and the divergent cultures around the globe.
Supply Chain Management System:
Supply chain management is defined as ―the design, planning, execution, control, and monitoring of
supply chain management systems with the objective of creating net value, building a competitive
infrastructure, leveraging worldwide logistics, synchronizing supply with demand, and measuring
performance globally.‖ (Globally, in this case, can mean either worldwide or applying to the chain as
a whole rather than to a particular entity within the chain).
The value chain definition of supply chain seems fairly solid when you consider the chain as linked
organizations—supplier, producer, and customer connected by product, information, and payment
flows. But the supply chain is more accurately viewed as a set of linked processes that take place in
the extraction of materials for transformation into products (or perhaps services) for distribution to
customers. Those processes are carried out by the various functional areas within the organizations

that constitute the supply chain. When considered as a set of processes rather than a succession of
companies, the supply chain becomes just a little more difficult to identify—let alone manage.
Figures mentioned below shows flow chart of supply chain management system or process.
What is Value Chain Mapping:
Although many would assume that a supply chain is, in fact, a value chain—at least it is if well
managed—others may draw a distinction between the two. A value chain is a string of collaborating
players who work together to satisfy market demands for specific products or services. The value
chain is made up of ―the functions within a company that add value to the goods or services that the
organization Bells to customers and for which it receives payment.‖
Value chains integrate a variety of supply chain activities throughout the product/service life cycle,
from determination of customer needs through product/service development,
production/operations, and distribution. The intent of a value chain is to increase the value of a
product or service as it passes through stages of development and distribution before reaching the
end user.
Not all value chain activities are technically part of the supply chain, and those engaged in them may
not understand their role in supporting the supply chain. Those activities might include engineering,
marketing, finance, accounting, information technology, human resources, and legal. For example,
managers from outside the supply chain often don‘t understand the requirements of supply chain
management, can‘t distinguish a value chain from a supply chain, and consequently don‘t provide
the SCM support required from their areas.

Value Stream:
Two closely related terms are value stream and value stream mapping. A value stream is the
processes of creating, producing, and delivering a good or service to the market. For a good, the
value stream encompasses the raw material supplier, the manufacture and assembly of the good,
and the distribution network. For a service, the value stream consists of suppliers, support personnel
and technology, the service ―producer,‖ and the distribution channel. The value stream may he
controlled by a single business or a network of several businesses.
A value stream encompasses all the primary actions required to bring a product or service from
concept to placing it in the hands of the end user. It also includes timing. Mapping the stream aids in
process improvement. A value stream encompasses all the primary actions required to bring a
product or service from concept to placing it in the hands of the end user. It also includes timing.
Mapping the stream aids in process improvement.

Supply Chain Strategy

It is defined as: "A strategy for how the supply chain will function in its environment to meet the
goals of the organization‘s business and organization strategies".
There‘s a kind of magic in some words, ―strategy‖ and ―strategic‖ being key examples. Place
―strategic‖ in front of the name of any business process and suddenly that process acquires an aura
of great importance. Strategic objectives cry out to be achieved in a way that simple objectives do
not. Strategic planning sounds considerably more sophisticated and powerful than plain old
planning. There‘s a reason those words have such power. Strategy, originally a military term, is how
generals marshal all available resources in pursuit of victory. Strategy wins football games and chess
matches—or loses them.
It‘s really the same in the business world. Each company has a business strategy that paints a broad
picture of how they will compete in the marketplace. Since business strategy is like military strategy
in that it requires the marshaling and organizing of all its resources, then it becomes clear that the
business‘s supply chain can be its most potent strategic resource. Designing and building the right
supply chain, one that promotes the business strategies, may just be the most powerful way to gain
an edge on the competition, to move faster, deliver more value, and be more flexible in the face of
both steady change and surprises. The supply chain strategy is a complex and evolving means that
organizations use to distinguish themselves in the competitive contest to create value for their
customers and investors.
As illustrated in figure mentioned below, you can see how the direction of a firm or organization is
predicated on its business strategy. Of course many organizations now also use mission and vision
statements to give clarity to their purpose.
If these strategies are not aligned, the direction and fit will be askew. All three strategies are linked
and dependent.

Business strategy
A plan for choosing how to compete. Three generic business strategies are:
 Least cost
 Differentiation
 Focus
Strategy (Organizational)
The strategy of an enterprise identifies how a company will function in its environment. The strategy
specifies how to satisfy customers, how to grow the business, how to compete in its environment,
how to manage the organization and develop capabilities within the business, and how to achieve
financial objectives.
Prior to discussing organizational and supply chain strategy in more detail, the first topic in the
section addresses business strategy and competitive advantages. Competitive advantages are closely
related to business strategy because they outline the advantages the organization should realize
once it has decided how it will compete.
Other concepts covered in this section include
 Organizational and supply chain strategy
 Prioritization options
 Organizational capabilities
 Alignment of capabilities and strategy
 Resolving misalignment or gaps

Strategic Supply Chain Management
Business Strategy
Typically a business strategy will outline how to grow the business, how to distinguish the business
from the competition and outperform them, how to achieve superior levels of financial and market
performance, and how to create or maintain a sustainable competitive edge. As per the definition
provided previously, business strategies include least cost, differentiation, and focus. Least cost
relates to a lower cost than the competition for an otherwise equivalent product or service.
Differentiation relates to a product or service with more features, options, or models than the
competition. Focus relates to whether the product or service is designed for a broad audience or a
well-defined market segment or segments. There are many ways that these generic strategies can be
combined or made into hybrids. For example, common business strategies that are generic to many
industries and manufacturers include the following variations:
 Best cost—creates a hybrid, low-cost approach for providing a differentiated product or service.
 Low cost—focuses on delivering low price and no-frills basics with prices that are hard to match.
 Broad differentiation—creates product and service attributes that appeal to many buyers looking for
variety of goods.
 Focused differentiation—develops unique strategies for target market niches to meet unique buyer
needs.
 Focused low cost—designed to meet well-defined buyer needs at a low cost

Competitive Advantages
Competitive advantages mirror the strategies used to create them: A competitive advantage exists
when an organization is able to provide the same benefits from a product or service at a lower cost
than a competitor (low cost advantage), deliver benefits that exceed those of a competitor‘s product
or service (differentiation advantage), or create a product or service that is better suited to a given
customer segment than what the competition can offer (focus advantage). The result of this
competitive advantage is superior value creation for the organization and its customers. If this

advantage is successfully implemented and marketed, it should result in improved profits and market
share.
Focus Advantage Strategies

The following discussion is divided into two ways to create a focus advantage:
 Niche marketing (versus mass marketing)

 Responsiveness
Niche Marketing (vs Mass Marketing)
Firms can choose to develop products and services for a mass market or for a relatively small slice of
a larger market—a market niche.
Some examples of niche market approaches include
 Catering to high-net-worth customers with products such as luxury automobiles, yachts, large homes,
or specialized services such as estate planning, personal training, or expensive cruises
 Designing for a limited age group, such as children or senior citizens with special needs instead of
serving a broader population
 Providing products or services for residents of a particular geographic area, such as growing vegetables
for a neighborhood market rather than for packaging and shipping around the nation or world.
Niche marketing shares some characteristics with product service differentiation. In both cases, the
product or service provided to customers has special features. Differentiation by quality, for example,
can be the same thing as catering to high-net-worth customers. (Low-net-worth customers, or value
shoppers, can also be niche.) Therefore, some supply chain strategies will work for both approaches.
Collaboration to achieve distinctive design is one example. Depending upon the niche, sourcing may
focus more on finding special expertise or high-quality materials rather than on low-cost labor.
Responsiveness
Perhaps the most obvious example of responsiveness is the fast-food industry that grew up in the
last half of the 20th century, led by McDonald‘s. Diners at fine restaurants will happily wait half an
hour for their specially cooked steak, but employees on short lunch breaks become impatient with
even a few minutes in line as their sandwiches are prepared. In the early days of the Toyota Prius
automobile—a highly differentiated car—buyers were known to wait for months for a new vehicle.
(The same phenomenon occurred when the Volkswagen ―Beetle‖ first came to the United States,
where it was both highly differentiated and a low-cost option.) But businesspeople or diplomats on
assignment expect a rental car or limousine to be ready immediately when they arrive at the airport.
Manufacturers of clothing prosper or go bankrupt by their ability to bring the latest seasonal designs
to market rapidly. Perishable products, such as raw food items, must be delivered rapidly, unlike
preserved foods. Services may also compete on the basis of speed by cutting time spent waiting on
the phone, standing in line, or processing paperwork.

Supply chains designed for responsiveness may rely on substantial supplies of safety stock to avoid
outages. (Overstocked seasonal items typically go on sale at the end of the season.) They may also
have multiple warehouses to place products nearer to users. Third-party providers of rapid
transportation, such as package delivery services, were developed to suit the needs of such supply
chains.
Choosing Business Strategies
While some firms may focus primarily on one business strategy, others may pursue a mix of
strategies. Note, however, that making one strategy the priority may make other strategies difficult
to achieve. For example, providing high quality at the lowest price is a challenge. But not all the
strategies are mutually exclusive. Product differentiation and niche marketing fit well together. Either
responsiveness or low cost may be a key competitive factor that differentiates a firm from its market
rivals.
Once an organization has decided on a business strategy, it uses these choices to drive the
organizational strategy and eventually the supply chain strategy.
Organizational and Supply Chain Strategy, Prioritization,

Capabilities, and Alignment
Organizational Strategy
Recall that the strategy of an enterprise identifies how a company will function in its environment.
The strategy specifies how to satisfy customers, how to grow the business, how to compete in its
environment, how to manage the organization and develop capabilities within the business, and how
to achieve financial objectives.
Where do you start when building an organization‘s strategy? As author and business consultant
Stephen R. Covey says in The Seven Habits of Highly Effective People, ―begin with the end in mind,‖
that is, think first about the goals of the strategy.
Goals of Organizational Strategy
Whatever strategy the corporation adopts to satisfy customers, grow, compete, organize itself, and
make money, the supply chain has to operate in a manner that furthers those goals. To give a simple
example, if customers are clamoring for deeply discounted prices on durable, high-volume goods
with stable demand, a supply chain strategy that invests heavily in sourcing lower-cost materials in
emerging markets would be on target for accomplishing that goal. Low-cost sourcing is probably the
best option for this strategy because purchasing machines involves a high capital investment and
lower labor expenses could help offset the investment costs. However, you might also look into
investing in equipment, as the high investment is covered by lower labor costs and increased

revenue. (It is possible for an organization to do both¬ invest in automation and move into a
geographic area where labor costs are less. That decision would be based on volume, payback
period, product life cycle, etc.)
Horizontal supply chains will contain a number of independent organizations, each with its own
goals, processes, operations, technology, and strategy. So, when we refer to the necessity of aligning
supply chain strategy with organizational strategy, we are referring to the strategies of a channel
master or nucleus firm. Traditionally, that‘s the manufacturer of a product—the company that sits
right at the center of the chain (or network) with suppliers in tiers on one side and customers on the
other.
However, if a supply chain has a dominant firm with a dominating strategy (one that is dictating its
requirements to others), for example, a large retailer, then supplier and manufacturer strategies and
goals must align with that retailer‘s organizational and supply chain strategies. The suppliers of
suppliers also have strategies to be brought into alignment. Finally, the strategies, once aligned, have
to do two things: serve the end customers‘ needs and be profitable for the chain as a whole and each
company individually.
The following looks at four types of organizational strategy in detail: customer focus and alignment,
forecast-driven enterprise, demand-driven enterprise, and number of supply chains.
Strategy: Customer Focus and Alignment
When it comes to supply chains, it‘s what‘s good for the customer that counts not what‘s good for
the nucleus company or even what seems to be good for the supply chain itself Supply chain
management needs to be focused on giving the final customer the right product at the right time
and place for the right price. It isn‘t necessarily about the most advanced product or service, nor is it
always about the lowest price, the fastest time, or the most convenient place. It‘s about the balance
of quality, price, and availability (timing and place) that‘s just right for the supply chain‘s customer.
How does one determine what is the right amount of each of those factors? There isn‘t a simple
formula that will help the supply chain manager with this decision. But there are some basic premises
that will help you get started in determining the appropriate balance:
 Serving the end-user customer is the primary driver of supply chain decisions.
 Organizations in the supply chain have to make a profit and stay in business to serve the customer.
Functional teams in the organization will provide their input and research on the optimal balance for
the supply chain to meet customer needs. Design engineers—or, better yet, design teams from
across the network—design products that are right for the end customer and can be sold profitably.
Market research looks for the true, and not always obvious, needs in potential consumers that the
supply chain can be engineered to satisfy profitably. Logistics strategy begins with data about
customer demands for availability—of materials, components, service, or finished products,
depending upon the customer—and then it looks for ways to move products in a cost-effective way
with acceptable risk.

Decisions are not just about product features or price or speedy delivery. They are about the right
features at the right price on the right schedule. DOS was not a great operating system; it was just
the right operating system for the time and the market.
The term ―customer‖ can be a complex concept in relation to supply chains because there are
multiple customers with different stakes in the process. When we talk about customer focus, we
mean the end user, the consumer of the product. But usually only the retailer actually sees the end
user and has a direct relationship with that person or entity.
Everyone else in the supply chain has a more immediate customer just downstream to our right in
the supply chain diagram. If the supply chain is completely aligned in its focus on the end customer,
then, at least in theory, serving the customer just to an organization‘s downstream side would
automatically serve the end user and also be in the supplying organization‘s best interest as well as
the interest of investors.
Moreover, within each supply chain partner there are internal ―customers‖ whose needs also must be
aligned with corporate and supply chain strategies. Each manager must understand his or her role in
making the supply chain profitable, and staff, too, must be rewarded, motivated, and trained in
alignment with the needs of the supply chain‘s end customer.
Consider sustainable supply chain management. Successfully managing for sustainability requires a
strategic mindset, involving numerous personnel and financial resources and a commitment from
suppliers from first to lower tiers of the supply chain as well as consumers further up the supply
chain. Departments must cooperate with other departments in their organization (e.g., purchasing
and environmental or design departments) and with their counterparts at suppliers. This type of
collaboration between supply chain partners necessitates breaking down cultural barriers and
building a culture of trust to ensure that the focus is on end-to-end supply chain activities and not
just discrete supply chain processes.
Creating and managing a sustainable supply chain requires an organization to be informed, exercise
leadership, and cooperate with all supply chain partners in achieving positive results on the triple
bottom line.
Strategy: Forecast-Driven Enterprise
A second organizational strategy is the forecast-driven enterprise. Simply put, this strategy is one in
which the nucleus firm, usually their manufacturer, utilizes a forecast, an estimate of future demand,
as the basis of its organizational strategy.
Here is the complicating factor: It is difficult to know what customer requirements will be from day to
day, month to month, quarter to quarter, and so on. For instance, if a manufacturer was guaranteed
that its wholesale or retail customers were going to need 1,000 SKUs (stock keeping units) every
Wednesday afternoon, then getting those products to customers at the right time and place would
be a matter of simple calculation based upon lead times for production and delivery. In turn, the

manufacturer would look at the bill of material, determine the lead time for each, and submit
schedules to its suppliers. Unfortunately, it‘s difficult to predict even the most stable demand—say,
for a product like diapers. There is some variability in demand for diapers, even though they aren‘t
subject to seasonal style changes or rapid peaks and valleys in response to outside influences
affecting ability to pay. (That‘s why Procter & Gamble cooperates with Wal-Mart to plan for demand
and replenishment of diapers.) The chain of demand begins at the far retail end of the supply chain
and works its way back toward the source of raw materials used in making the product. The
traditional way of attempting to satisfy this demand is to forecast it.
In this retail example, forecasting along the chain works like this:
 The retailer forecasts demand from parents who purchase diapers

 The wholesaler forecasts demand from all its retailers
 The manufacturer forecasts demand from the wholesale distributors
 The component suppliers forecast demand from manufacturers
 The raw materials suppliers forecast demand from the component manufacturers
How effective is this strategy? Let‘s say you don‘t want to be placing large bets on the accuracy of all
those forecasts. Here‘s what actually happens:
 Parents vary their diaper-buying patterns in fairly small increments due to . factors nobody fully
understands. They may go to different stores for a change, shop on Tuesday instead of Wednesday, or
buy two or three weeks‟ worth at one time because the diapers are on sale. So, actual demand never
quite meets the forecast
 Meanwhile the retailer had already ordered enough to allow a little extra “safety stock” to put in its
storeroom. (For retailers, safety stock is a quantity of stock planned to be in inventory to protect against
fluctuations in demand or supply.) Or maybe the retailer runs a promotion that is not communicated to
the distributor, thus resulting in needing a larger order than was previously forecasted. These
fluctuations impact forecasting for the distributor.
 The wholesale distributor had forecasted demand based on past orders from its retailers. But now those
demand patterns have a wider variability than the demand pattern at the retailer‟s checkout counters
due to that safety stock the retailer held on to. Sometimes the safety stock accumulates because
demand is less than the forecast, and this means that the retailer‟s next order is for less than its
forecast—or perhaps it doesn‟t have to order at the usual time at all, because it has a glut of diapers—
which it probably sells off in a promotion. The upshot of all this is that the small variations in end-user
demand are magnified at the distributor.
 Up the chain, the manufacturer of those diapers looks at the demand pattern from the distributor and
makes its own forecasts, which show an even wider swing in variability.
 And this variability goes up the chain with ever-wider swings.
As mentioned earlier in this chapter, this pattern of variability is called the bullwhip effect, and it
affects all manner of supply chains that are based on serial forecasting by each independent division
or firm that touches the product as it travels from raw material to finished retail item.

Strategy: Demand-Driven Enterprise
The next organizational strategy we‘ll look at is the demand-driven enterprise. The bullwhip effect is
driven by demand forecasts; the solution is to replace the forecasts with actual demand information.
This isn‘t necessarily a simple matter either, but supply chain professionals have evolved techniques
for letting actual orders (not forecasts) drive production and distribution.
In the demand-driven chain, supply management is focused on customer demand. Instead of
manufacturers planning their operations based on factory capacity and asset utilization, the demand-
driven supply model operates on a customer-centric approach that allows demand to drive supply
chain planning and execution—moving the ―push-pull frontier,‖ as it‘s called, back up the chain at
least to the factory. Instead of producing to the forecast and sending finished products to inventory,
the production process is based on sales information. There is, in other words, no fixed production
schedule in a strictly demand-driven supply chain. Product is turned out only in response to actual
orders, ―on demand,‖ in other words. (Note, however, that on the supplier side of the plant, forecasts
still determine delivery of raw material. The art of forecasting remains crucial, even in a demand-
driven chain.)
This is also known as a ―pull system,‖ and it entails the following:
 In production, the production of items only as demanded for use or to replace those taken for use.
 In material control, the withdrawal of inventory as demanded by the using operations. Material is not
issued until a signal comes from the user.
 In distribution, a system for replenishing field warehouse inventories where replenishment decisions are
made at the field warehouse itself, not at the central warehouse or plant.
 When a supply chain works in response to forecasts, it‟s called a “push” chain, and it entails the
following:
 In production, the production of items at required times based on a given schedule planned in advance.
 In material control, the issuing of material according to a given schedule or issuing material to a job
order at its start time.
 In distribution, a system for replenishing field warehouse inventories where replenishment decision
making is centralized, usually at the manufacturing site or central supply facility.
Everything in a push system is pushed downstream from one point to the next according to
schedules based on the forecasts. The supplier delivers components in the amounts determined by
the schedule to inventory, where they await use in manufacturing. The plant turns them into finished
products and pushes the products to the distribution center or the retailer, where they await an
order from downstream.
The challenge in changing from forecast-driven (push) to demand-driven (pull) systems is in

reducing inventory without also lowering customer satisfaction. When a demand-driven system is set
up and managed properly, it can actually enhance customer service while reducing costs. But
stockouts are a risk.

As always with supply chains, the decision to switch to a demand-pull process trades one type of risk
for another:
 In the forecast-push process, the risk is related to the build-up of inventory all along the chain. Not only
does inventory cost money while it sits in a retail stockroom, distribution center, or preproduction
storage area; it runs the risk of becoming Obsolete or irrelevant for a number of reasons. In a world of
sapid innovation, inventory obsolescence is a very real threat. (For example, Cisco Systems, for years an
exemplar of successful and innovative supply chain management, had to dispose of US$2.25 billion
worth of useless inventory when the dot-coin bubble burst at the beginning of this millennium. All
those season close-out sales you see in clothing and department stores are a way of clearing out the
overstock. Bookstore remainder tables (which are much less in evidence than they were a decade or two
in the past) are a sign of inventory overhang caused by failed forecasting.
 Magazine distributors used to destroy huge quantities of monthly magazines 12 times a year when they
came back from retail outlets. (Since magazines are inexpensive to produce and destroy compared to
their retail price, the distributors would rather destroy ten copies than miss one sale.) Those are the
results of producing to forecasts that no one trusts and purposely overstocking to be sure of meeting
unexpectedly high demand.
 In the demand-pull, make-to-order model, on the other hand, the risk is that orders will begin to come
in above capacity and al/ along the chain there will be expensive activity to run the plant overtime, buy
more and faster transportation, or sweet-talk customers into waiting for their orders to be filled or
substituting a different product. (Running short of stock is also a risk in the forecast-driven chain.
Forecasts can be wrong in either direction. That‟s why the safety stock builds up at each point where
orders come in.) One technique to prepare for uncertain demand is kitting, which is preparing
(making/purchasing) components in advance, grouping them together in a “kit,” and having them
available to assemble or complete when an order is placed.
In Gartner‘s annual supply chain report, they rank the top 25 demand-driven supply chains, thereby
underscoring the importance of this strategy. In fact, the companies that gain a position on this list
have all applied demand-driven principles to coordinate supply, demand, and product management
to better respond to market demand. If you would like additional information about this report, a
link is provided in the online Information Center.
In reality, most organizations pursue a push-pull strategy and the point where push moves to pull is
the key strategic decision. Once that decision has been made, building a demand-driven enterprise
can require significant changes in all supply chain processes. The following are some major steps:
 Provide access to real demand data along the chain for greater visibility of the end customer. The first
requirement is to replace the forecasts with real data. The only supply chain partner with access to
these data first hand is the retailer, and retailers in the past have been no more willing to share
business data than any other firms. The other partners lack “visibility”—one of the main supply chain
principles. They simply cannot see what‟s going on with the end customer. But visibility is a necessity
for building a pull system, and pioneers like Wal-Mart have led the way in that regard. With point-¬of-
sale scanning or radio frequency identification (RFID), a retailer can alert its suppliers to customer
activity instantaneously. Instead of producing to the monthly forecast, manufacturers with that kind of

immediate signal from the front lines can plan one day‟s production runs at the end of the preceding
day. They produce just enough to replace the sold items.
 Establish trust and promote collaboration among supply chain partners. Collaboration is implied in the
sharing of information. But more is at stake than simply sharing sales information. Partners may have
to invest in new technology and develop new systems to be able to use the real-time data. With orders
going out without a schedule, all processes will have to be altered—warehousing (storage no longer
needed), packaging, shipping, and planning will all be handled differently in the new system. In return
for receiving real-time data that allow reduction of inventory; suppliers and distributors have to agree
to change their processes in whatever ways may be necessary to make the new system function without
disrupting customer service.
 Increase agility of trade partners. Because the inventory buffers will not exist or will be much reduced in
this demand-driven supply chain, the trade partners need to develop agility—the ability to respond to
the variability in the flow of orders based on sales. The plant, for example, may have to undergo
considerable change if it has to produce several different kinds of products under the new
circumstances. When making to forecast, a plant can run a larger volume of each product to send to
inventory. But when making to order, the plant may have to produce several different types of products
in a day. There will be no room for long changeover times between runs of different products; therefore,
equipment, processes, work center layouts, staffing, or siting—or all these things—may have to change
to create the capacity required to handle the new system.
Strategy: Number of Supply Chains
The last strategy we‘ll cover is based on a company having more than one supply chain, depending
upon the number and types of products that are passing along the chain and other variables. For a
product with a complex bill of material (many parts that combine into many components to make
the final product), a manufacturer may be bringing in materials from many suppliers. And these
materials might range from low-priced commodities to fragile or sophisticated materials that require
special shipping and handling. Suppliers might range from small specialized firms to raw materials
giants larger than the manufacturer. Some are key accounts; some might be occasional buyers. The
finished products may be sold through several different channels—c-commerce, printed catalogs,
commercial, and retail. These variables may combine in different ways, each suggesting its own type
of supply chain strategy. Next we‘ll explore how product types, functional versus innovative, often
require different supply chain strategies.
In ―What Is the Right Supply Chain for Your Product?‖ Marshall L. Fisher distinguished two types of
products, functional versus innovative, that require different supply chain strategies.
Functional products that change little from year to year have longer life cycles (perhaps more than
two years), relatively low contribution margins, and little variety. Because demand for them is stable,
they are fairly easy to forecast, with a margin of error of about 10 percent, very few stockouts, and no
end-of season markdowns. The appropriate supply chain for these products should emphasize
predictability and low cost with performance indicators such as the following:
 High average utilization rate in manufacturing

 Minimal inventory with high inventory turns

 Short lead time (consistent with low cost)
 Suppliers chosen for cost and quality
 Product design that strives for maximum performance and minimal cost
However, make-to-order functional products, such as replacement parts for customized equipment,
usually have long lead times (six months to a year).
Innovative products have unpredictable demand, relatively short life cycles (three months for
seasonal clothing), and high contribution margins of 20 to 60 percent. They may have millions of
variants in each category, an average stockout rate from 10 to 40 percent, and end-of-season
markdowns in the range of 10 to 25 percent of regular price. The margin of error on forecasts for
innovative products is high-40 to 100 percent—but the lead time to make them to order may be as
low as one day and generally is no more than two weeks.
The supply chain for innovative products should emphasize market responsiveness rather than
physical efficiency, with performance indicators such as the following:
 Excess buffer capacity and significant buffer (or safety) stock of parts or finished items
 Aggressive reduction of lead times
 Suppliers chosen for speed, flexibility, and quality (rather than cost)
 Modular design that postpones differentiation as long as possible
Innovative products, with their high margins and unpredictable demand, justify the extra expense for
holding costs. (Fisher also proposes, however, that manufacturers of innovative products can look for
other solutions to the problem of unpredictable demand, such as aggressively reducing lead times
and producing products to order rather than for inventory.)
Here is a conundrum... What happens when a product can fall into either category? Fisher says that
some products can be either innovative or functional. Automobiles fit that description, with a low-
priced, no-frills car like a base model Chevrolet Cobalt or Hyundai Excel representing the functional
end of the spectrum and a Porsche representing the other end. Similarly, coffee can be functional—
as anyone who has worked in an office knows, in which case it should be available quickly at a low
price with perhaps cream and sugar as options. At a high-end coffee shop, on the other hand,
patrons are willing to endure longer lead times and pay more money for their coffee, but they want
variety in return.
The idea that the same type of product can be either functional or innovative implies that one
company might have more than one supply chain. And that‘s the contention of Jonathan Byrnes, a
professor at MIT. Writing in the Harvard Business School‘s Working Knowledge, Byrnes asserts that
one supply chain is not enough; two, three, or more would be preferable. ―One size fits all‖ supply
chains may have been sufficient in the past, he believes, when that was the competitive norm, but
new information technology makes it possible to have multiple, dynamic chains that can
accommodate different product and information flows.
Byrnes breaks products into three categories: staples, seasonal products, and fashion.

 Staples (which are much like Fisher‟s functional products) have steady, year-round demand and low
margins. White underwear is an example. Byrnes advises stocking staples only in retail outlets in small
quantities and transporting them in truckload quantities. (A full truck, is more cost-effective for the
shipper than a partially loaded vehicle.)
 Seasonal products could include outdoor patio furniture, holiday decor, etc., for which the demand is
more predictable since it is tied to the holiday season.
 Fashion products are like Fisher‟s innovative items, with unpredictable demand. Zara, the Spanish
clothing manufacturer, has two supply chains, one for staples and the other for fashion clothing. To get
the fastest response time, Zara uses European suppliers for the fashion items. But for the more
predictable demand items, it uses eastern European suppliers that have poor response time (not a
concern) and lower cost.
In addition to varying the supply chain by product type, Fisher recommends several other variables
to consider—store type and time in season or product cycle. Demand varies considerably over the
life cycle of many products. The same item might have infrequent demand at first, more stable
demand in its maturity phase, and falling demand at the end of its life cycle. With more than one
supply chain, the nucleus firm can move its products from one chain to the other in response to
changing variables, such as type of channel or life-cycle stage.
Business and organizational strategies are formalized and clearly specified within an organization‘s
business plan, so this is discussed next.
Business Plan
A business plan is a written document that describes the overall direction of the firm and what it
wants to become in the future. A business plan is defined in part as follows:
A statement of long-range strategy and revenue, cost, and profit objectives usually accompanied by
budgets, a projected balance sheet, and a cash flow (source and application of funds) statement. A
business plan is usually stated in terms of dollars and grouped by product family. The business plan
is then translated into synchronized tactical functional plans through the production planning
process (or the sales and operations planning process). Although frequently stated in different terms
(dollars versus units), these tactical plans should agree with each other and with the business plan.
The business plan provides general direction regarding how the firm plans on achieving its long-term
objectives. Key functions such as finance, engineering, marketing, and operations typically have input
into the plan. The overall strategic plan cascades down to those same functions.
The finance function manages and tracks the sources of funds, amounts available for use, cash flows,
budgets, profits, and return on investment. Engineering is responsible for research and development
and the design and redesign of products that can be made most economically. Marketing‘s focus is
on analysis of the marketplace and how the firm positions itself and its products. (You will learn more
about the role of marketing in the next section.) The goal of the operations function is to meet the
demands of the marketplace via the organization‘s products. Operations also manages the

manufacturing facilities, machinery, equipment, labor, and-materials as efficiently as possible. These
functional roles collectively support the success of the supply chain.
The business plan is based on and aligned with the business strategy and with market requirements.
It provides a framework for the organization‘s performance objectives that are tied to strategic goals.
In the ideal world, formation of and changes to the business plan come from top management‘s
modifications to the business strategy and organizational strategy. But in reality that may not always
be the case.
Supply Chain Strategies

The supply chain has the overarching goal of providing customers with goods and services when
they want them, at a competitive price, while being consistent with the organization‘s and extended
supply chain‘s strategies. If the supply chain cannot successfully execute this strategy, the business,
or product line, may cease to exist.
When you think about the role the supply chain plays in the bigger context of your company, the
functional strategies underlying supply chain management must articulate with the business plan,
and remember also that the purpose of supply chains is to be globally competitive. Time, distance,
and collaboration are basic elements in modern supply chains that impact the chain‘s ability to
respond to competitive changes in the global marketplace. The relationships of time, distance, and
collaboration weave like three bright threads through the fabric of any supply chain on the globe.
Therefore, collaborative relationships are explored further as they are a primary component of supply
chain strategy.

What is Logistics Management?

What is Logistics?
Let us start this topic with the understanding of What is Logistics? and What is Logistics
Management?. Logistics is defined as ―the art and science of obtaining, producing, and distributing
material and product in the proper place and in proper quantities.‖ It is a rapidly evolving business
discipline that involves management of order processing, warehousing, transportation, materials
handling, and packaging—all of which should be integrated throughout a network of facilities. Now
that‘s a tall order! Although logistics has been performed around the globe since ancient civilizations
were at war with one another, we‘re still learning and trying to become experts at managing it.
Despite the research and progress that‘s been made, logistics is still one of the most dynamic and
challenging operational areas of supply chain management.
At the most basic level, logistics management includes the various related tasks required to get the
right goods to the right customers at the right time. Others tout a broader definition: getting the
right product in the right quantity and right condition at the right place at the right time for the right
customer at the right price.
No other function in the supply chain is required to operate 24 hours a day, seven days a week from
New Year‘s Day to New Year‘s Eve—there are no days off. That is why customers often take logistics
for granted; they have come to expect that product delivery will be performed as promised. But it‘s
not that simple, as you will learn. It can be expensive and takes expertise.
Logistics management adds value to the supply chain process if inventory is strategically positioned
to achieve sales. But the cost of creating this value is high. According to the 19th annual ―State of
Logistics Report‖ by the Council of Supply Chain Management Professionals published in 2008,
United States companies spent US$1,398 billion performing logistical services in 2007.
Transportation costs for the same year ran US$857 billion, and that constituted nearly 62 percent of
total logistics costs.
As these statistics indicate, the largest contributor to logistics cost is transportation: the movement
of raw materials to a processing plant, parts to a manufacturer, and finished goods to wholesalers,
retailers, and customers. But getting the goods from one point to another requires performing a
number of other functions related to shipment. Goods need to be packaged, loaded, unloaded,
warehoused, distributed, and paid for whenever they change hands.
Supply chain partners must efficiently and effectively carry out these logistical tasks to achieve
competitive advantage. In an increasingly global market, this may require mastery of languages,
currencies, divergent regulations, and various business climates and customs.
Defining logistics precisely presents a challenge. Everyone agrees that logistics management is (or
should be) a part of supply chain management. As Douglas Long writes, ―Supply chain management

is logistics taken to a higher level of sophistication.‖ The exact line of demarcation between the two
management systems is understandably a bit vague.
In their classic text Supply Chain Logistics Management, authors Bowersox, Closs, and Cooper
include several functions that are treated outside the logistics, such as forecasting and inventory
management. Some authorities may place those two functions within the scope of logistics
management, while others may not, but all agree that inventory and forecasting must be considered
when designing and managing an effective, efficient system for moving goods quickly from place to
place.
What is Logistics in Supply Chain Management?

The supply chain is about ―moving‖ - or ―transforming‖ - raw materials and ideas into products or
services and getting them to customers. Well the question is what is logistics management? in supply
chain. Logistics is about moving materials or goods from one place to another. Logistics is, in that
sense, the servant of design, production, and marketing. But it is a servant that can bring added
value by quickly and effectively doing its job. The following areas of logistics management contribute
to an integrated approach to logistics within supply chain management.
Figure below combines several perspectives to illustrate what is logistics?, in a broader scope.

Transportation:
Many modes of transportation play a role in the movement of goods through supply chains: air, rail,
road, water, pipeline. Selecting the most efficient combination of these modes can measurably
improve the value created for customers by cutting delivery costs, improving the speed of delivery,
and reducing damage to products.
Warehousing:
When inventory is not on the move between locations, it may have to spend some time in a
warehouse. Warehousing is ―the activities related to receiving, storing, and shipping materials to and
from production or distribution locations.‖
Third- and fourth-party logistics:
Like other aspects of supply chain management, the various logistics functions can be outsourced to
firms that specialize in some or all of these services. Third-party logistics providers (3PLs) actually
perform or manage one or more logistics services. Fourth-party providers (4PLs) are logistics
specialists and play the role of general contractor by taking over the entire logistics function for an
organization and coordinating the combination of divisions or subcontractors necessary to perform
the specific tasks involved. This growing trend incorporates the supply chain management
philosophy of concentrating on core competencies and partnering with other firms to perform in
areas outside your competence. We‘ll learn more about 3PLs and 4PLs later in this section.
Reverse logistics (or the reverse supply chain):
Another growing area of supply chain management is reverse logistics, or how best to handle the
return, reuse, recycling, or disposal of products that make the reverse journey from the customer to
the supplier. This business can be handled at a loss, or it can actually become a profit center. We‘ll
also cover this topic in more detail later in this section.

Logistics Management Value Proposition:

Being able to match key customer expectations and requirements to your firm‘s operating
competency level and customer commitment is the essential ingredient in optimizing the value of
logistics. The logistics value proposition stems from a unique commitment of your firm to an
individual customer or select group of customers. The value stems from your ability to know exactly
how to balance logistics costs against the appropriate level of customer service for each of your key
customers.
So you‘ll need to determine the exact recipe and proportion of ingredients in order to meet a
particular customer‘s logistical expectations and requirements. How will you know when you‘ve got
the right balance? If you keep in mind that logistics must be managed as an integrated effort to
achieve customer satisfaction at the lowest total cost, then it makes sense that service and cost
minimization are the key elements in this proposition.
Service:
What company hasn‘t had to pay a painfully high price to ship a product overnight to meet a
deadline of some sort? It can be done, but it‘s not fiscally prudent. In the same manner, any level of
logistical service can be achieved if a company is willing and able to pay for it. So technology isn‘t
the limiting factor for logistics for most companies—it‘s the economics. For instance, what does it
cost to keep the service level high if a firm keeps a fleet of trucks in a constant state of delivery
readiness or it keeps dedicated inventory for a high volume customer that can be delivered within
minutes of receiving an order. How do you decide if that‘s money well spent?
The key is to determine how to outperform competitors in a cost-effective manner. If a table

manufacturer needs a specific type of wood to produce all its table legs but that wood type is not
available, it may force the plant to stop or close down until the material arrives, thereby incurring
expensive delays, potential lost sales, and decreased customer satisfaction. In contrast, if a home
improvement store experiences a one-day delay in inventory replenishment of 20-watt night-light
bulbs at its warehouse, the impact on profit and operational performance is likely to be very low and
insignificant.
In the majority of situations, the cost-benefit impact of a logistical failure is directly related to the
importance of the service to the customer. When a logistical failure will have a significant impact on
a customer‘s business, error-free logistics service should receive higher priority. Such service implies
that the customer order was complete, delivered on time, and consistently correct over time.

Cost Minimization
The second element of the value proposition, cost minimization, should be interpreted as the total
cost of logistics in order to be accurate. The total cost of logistics as ―the idea that that all logistical
decisions that provide equal service levels should favor the option that minimizes the total of all
logistical costs and not be used on cost reductions in one area alone, such as lower transportation
charges.‖
For many decades, the accounting and financial departments in organizations sought the lowest
possible cost for each logistical function, with little or no attention paid to integrated total cost
trade-offs. As they learned later, that did not work very well. So today‘s leading supply chain
companies develop functional cost analysis and activity-based costing activities that accurately
measure the total cost of logistics. The goal now is for logistics to be cost-effective as determined by
a cost-benefit analysis, taking into account how a logistical service failure would impact a customer‘s
business.
Logistics Management - Goals and Strategies:

At the highest level, logistics management shares the goal of supply chain: ―to meet customer
requirements.‖ There are a number of logistics goals that most experts agree upon:
 Respond rapidly to changes-in the market or customer orders.

 Minimize variances in logistics service.
 Minimize inventory to reduce costs.
 Consolidate product movement by grouping shipments.
 Maintain high quality and engage in continuous improvement.
 Support the entire product life cycle and the reverse logistics supply chain.
An effective logistics management strategy depends upon the following tactics:
 Coordinating functions (transportation management, warehousing, packaging, etc.) to create maximum

value for the customer.
 Integrating the supply chain.
 Substituting information for inventory.
 Reducing supply chain partners to an effective minimum number.
 Pooling risks.
We‘ll analyze each of these tactics.

Coordinating Functions:
Logistics can be viewed as a system made up of interlocking, interdependent parts. From this
perspective, improving any part of the system must be done with full awareness of the, effects on
other parts of the system. Before the advent of modern logistics management, however, the various
operations contributing to the movement of goods were usually assigned to separate departments
or divisions, such as the traffic department. Each area had its own separate management and
pursued its own strategies and tactics.
Decisions made in any one functional area, however, are very likely to affect performance in other
areas, and an improvement in one area may very well have negative consequences in another unless
decisions are coordinated among all logistics areas. Adopting more efficient movement of goods, for
example, may require rethinking the number and placement of warehouses. Different packaging will
almost certainly affect shipping and storage. You may improve customer service to a level near
perfection but incur so many additional expenses in the process that the company as a whole goes
broke.
You need a cross-functional approach in logistics, just as you do in supply chain management as a
whole. Teams that cross functions are also very likely to cross company boundaries in a world of
international supply chains with different firms focused on different functions.
The overall goal of logistics management is not better shipping or more efficient location of
warehouses but more value in the supply network as measured by customer satisfaction, return to
shareholders, etc. There is no point, for instance, in raising the cost of shipping—thus, the price to
the customer—to make deliveries faster than the customer demands. Paying more to have a
computer delivered today rather than tomorrow may not be a tradeoff customers want to make.
Getting a still-warm pizza delivered in less than 20 minutes, however, might be worth a premium
price (and a tip). Fast delivery, in other words, is not an end in itself, and the same is true of any
aspect of logistics management or supply chain management.
Integrating the Supply Chain:
Integrating the supply chain requires taking a series of steps when constructing the logistics network.
In a dynamic system, steps may be taken out of order and retaken continuously in pursuit of quality
improvements; the following list puts the steps in logical order.
LOCATE IN THE RIGHT COUNTRIES:

 Identify all geographic locations in the forward and reverse supply chains.
 Analyze the forward and reverse chains to see if selecting different geographic locations could make the
logistics function more efficient and effective. (Not all countries are equal in terms of relevant concerns
such as infrastructure, labor, regulations, and taxes).
DEVELOP AN EFFECTIVE IMPORT-EXPORT STRATEGY:
 Determine the volume of freight and number of SKUs (stockkeeping units) that are imports and exports.
 Decide where to place inventory for strategic advantage. This may involve deciding which borders to
cross and which to avoid when importing and exporting as well as determining where goods should be
stored in relation to customers. (Some shipping companies now add a “war risk surcharge” if they‟re
required to pass through or near a nation with civil unrest or at war.) Both geographic location and
distance from the customer can affect delivery lead times.
SELECT WAREHOUE LOCATION:
 Determine the optimal number of warehouses.

 Calculate the optimal distance from markets.
 Establish the most effective placement of warehouses around the world.
SELECT TRANSPORTATION MODES AND CARRIERS:
 Determine the mix of transportation modes that will most efficiently connect suppliers, producers,
warehouses, distributors, and customers.
 Select specific carriers.
SELECT THE RIGHT NUMBER OF PARTNERS:
 Select the minimum number of firms freight forwarders and 3PLs or a 4PL to manage forward and
reverse logistics. In selecting logistics partners, also consider their knowledge of the local markets and
regulations.
DEVELOP STATE-OF-THE-ART INFORMATION SYSTEMS:
 Reduce inventory costs by more accurately and rapidly tracking demand information and the location
of goods. Developing state-of-the-art information systems may be difficult in some regions. Such
situations make defining the processes and information flows even more critical.

Substituting Information for Inventory
Physical inventory can be replaced by better information in the following ways:
 Improve communications. Talk with suppliers regularly and discuss plans with them.
 Collaborate with suppliers. Use HT to coordinate deliveries from suppliers. Remove obsolete inventory.
Use continuous improvement tools and share observations about trends.
 Track inventory precisely. Track the exact location of inventory using bar codes and/or RFID (radio
frequency identification) with GPS (global positioning systems).
 Keep inventory in transit. It‟s possible to reduce systemwide inventory costs by keeping inventory in
transit. One method of keeping inventory in motion the maximum amount of time is a distribution
strategy called cross-docking. Used with particular success by Wal-Mart, cross-docking involves moving
incoming shipments directly across the dock to outward-bound carriers. The inventory thus transferred
may literally never be at rest in the warehouse.
Another example of cross-docking can be taken from the airline industry. When a passenger travels
from Seattle to New York, he or she might be cross-docked in Chicago. The airline has configured
their network in this way as opposed to having direct flights from city to city. Passengers are not
warehoused per se but simply pass through the airport in an hour or two, getting off of one plane
and onto another. At the end of the day, ideally the airport should be empty, as should all cross-
docking locations.
A trailer, railcar, or barge can be considered a kind of mobile warehouse. Rolling inventory should be
closely tracked by GPS to facilitate rapid adjustments if a shipment is delayed or lost or if a customer
changes an order at the last minute.
 Use postponement centers. Avoid filling warehouses with the wrong mix of finished goods by setting up
postponement centers to delay product assembly until an actual order has been received.
 Mix shipments to match customer needs. Match deliveries more precisely to customer needs by mixing
different SKUs on the same pallet and by mixing pallets from different suppliers.
 Don‟t wait in line at customs. Reduce the time spent in customs by clearing freight while still on the
water or in the air.
Reducing Supply Chain Partners to an Effective Number
Though you have to watch out for tradeoffs in effectiveness when reducing the number of logistics
partners, you can generally increase efficiency by doing so. If possible, look for an entire echelon
(tier) you can do without such as all the wholesale warehouses or factory warehouses
The more partners there are in the chain, the more difficult and expensive the chain is to manage.
Handoffs among partners cost money and eat up time. Having many partners means carrying more

inventory. Reducing the number of partners can reduce operating costs, cycle time, and inventory
holding costs. There is, however, some lower limit below which you create more problems than you
solve. If you eliminated all partners other than your own firm, you‘d be back to the vertical
integration strategy pursued in a simpler marketplace during the early 20th century by U.S. auto-
maker Henry Ford.
Pooling Risks:
In regard to inventory management, pooling risks is a method of reducing stockouts by

consolidating stock in centralized warehouses. The risk of stockouts increases as supply chains
reduce the safety stock held at each node and move toward Just-in-Time ordering procedures. With
every entity attempting to keep inventory costs down in this manner, the risk of stockouts rises if
buying exceeds expectations. Statistically speaking, when inventory is placed in a central warehouse
instead of in several smaller warehouses, the total inventory necessary to maintain a level of service
drops without increasing the risk of stockouts. An unexpectedly large order from any one customer
will still be small in relation to the total supply available.
Risk pooling also works with parts inventories. Risk pooling is defined as follows:
 A method often associated with the management of inventory risk. Manufacturers and retailers that
experience high variability in demand for their products can pool together common inventory
components associated with a broad family of products to buffer the overall burden of having to deploy
inventory for each discrete product.
 By using a central warehouse to hold parts common to many products, a supply network can reduce
storage costs and the risks of stockouts that would be experienced in smaller, decentralized warehouses.
 There are tradeoffs to consider. Because the central warehouse may be further away from some
production facilities than the smaller warehouses would be, lead times and transportation costs are
likely to go up. Again, logistics has to be managed from the point of view of improving the value of the
overall system, not just one part of the system.
Flow of Goods and Information:

If you recall, there are flows of goods (product or inventory) and information in each supply chain.
Customer information flows through the enterprise via orders, sales activity, and forecasts. As
products and materials are procured, a value-added flow of goods begins. The enterprise must have
internal process integration and collaboration between functions as well as alignment and
integration across the supply chain.
With a foundation in the role of logistics and its operational areas, we‘re ready to discuss how and
why firms outsource some or all of their logistics operations.

Supplier Relationship Management

Supply Chain Relationships and Supplier Relationship Management
Let us start this lecture with the fundamental concepts of supply chain relationships and supplier
relationship management. SRM is infact a type of relationship management, which affects all areas
of the supply chain and has a dramatic impact on supply chain performance. One of the most
fundamental yet more challenging requirements for supply chain integration is changing the nature
of traditional relationships between suppliers and customers in the supply chain. In many cases, the
information systems, technology, inventory, and transportation management systems required for
the supply chain management (SCM) effort are available and ready to be implemented, but the
initiatives fail due to poor communication of expectations and the resulting behaviours.
Relationship Management is defined as the strategy employed by an organization in which a

continuous level of engagement is maintained between the organization and its audience.
Relationship management can be between a business and its customers (customer relationship
management) and between a business and other businesses (business relationship management).
Managers often assume that the personal relationships important to the supply chain will fall into
place; however, managing relationships among organizations can be the most difficult part of the
SCM initiative.
Moreover, the single most important ingredient for successful SCM may be trusting relationships
among partners in the supply chain, where each party has confidence in the other members‘
capabilities and actions. And trust building is characterized as an ongoing process that must be
continually managed. One materials management vice president at a Fortune 500 manufacturer
expressed this feeling as follows:
"Supply chain management is one of the most emotional experiences I've ever witnessed.
There have been so many mythologies that have developed over the years, people blaming
other people for their problems based on some incident that may or may not have occurred
sometime in the past. Once you get everyone together into the same room, you begin to
realize the number of false perceptions that exist. People are still very reluctant to let
someone else make decisions within their area".
Supplier Relationship Management - a Perspective
In the early stages of supply chain development, organizations often eliminate suppliers or
customers that are unsuitable, because they lack the capabilities to serve the organization, they are
not well aligned with the company, or they are simply not interested in developing a more
collaborative relationship. Then, organizations may concentrate on supply chain members who are
willing to contribute the time and effort required to create a strong relationship. Firms may consider

developing a strategy with this supplier to share confidential information, invest assets in joint
projects, and pursue significant joint improvements.
However, many firms lack the guidelines to develop, implement, and maintain supply chain alliances
in creating new value systems, companies must rethink how they view their customers and suppliers.
They must concentrate not just on maximizing their own profits, but on maximizing the success of all
organizations in the supply chain. Strategic priorities must consider other key alliance partners that
contribute value for the end customer. Instead of encouraging companies to hold their information
close, trust-building processes promote the sharing of all forms of information possible that will
allow supply chain members to make better, aligned decisions. Whereas traditional accounting,
measurement, and reward systems tend to focus on individual organizations, a unified set of supply
chain performance metrics should be utilized as well.
Strategic alliances can occur in any number of different markets and with different combinations of
suppliers and customers. A typical supplier-customer alliance involves a single supplier and a single
customer. A good example is the relationship between Proctor & Gamble and Wal-Mart, which have
worked together to establish long-term electronic data interchange (EDI) linkages, shared forecasts,
and pricing agreements. Alliances also can develop between two horizontal suppliers in an industry,
such as the relationship between Dell and Microsoft—organizations that collaborate to ensure that
the technology road map for Dell computers (in terms of memory, speed, etc.) will be aligned with
Microsoft‘s software requirements. Finally, a vertical supplier-supplier alliance may involve multiple
parties, such as trucking companies that must work with railroads and ocean freighters to ensure
proper timing of deliveries for multi-modal transshipment.
Overall, creating and managing a strategic alliance means committing a dedicated team of people to
answering these questions, and working through all of the details involved in managing the
relationship. Unfortunately, there is no ―magic bullet‖ to ensure that alliances will always ‗work

However, it is reasonable to assume that, like a marriage, the more you work at it, the more
successful it is likely to be!
Supply Chain Relationships - in General
Many firms have directed significant attention toward working more closely with supply chain
partners, including not only customers and suppliers but also various types of logistics suppliers.
Considering that one of the fundamental objectives of effective supply chain management is to
achieve coordination and integration among participating organizations, the development of more
meaningful ―relationships‖ through the supply chain has become a high priority.
Supply chain relationships in general, with an emphasis on the types of relationships, the processes
for developing and implementing successful relationships, and the need for firms to collaborate to
achieve supply chain objectives. The second is that of the third-party logistics (3PL) industry in
general and how firms in this industry create value for their commercial clients. The 3PL industry has
grown significantly over recent years and is recognized as a valuable type of supplier of logistics
services.
As suggested by the late Robert V. Delaney in his 11th Annual State of Logistics Report,1
relationships are what will carry the logistics industry into the future. In commenting on the current
rise of interest in e-commerce and the development of electronic markets and exchanges, he states,
―We recognize and appreciate the power of the new technology and the power it will deliver, but, in
the frantic search for space, it is still about relationships.‖ This message not only captures the

importance of developing logistics relationships but also suggests that the ability to form
relationships is a prerequisite to future success. Also, the essence of this priority is captured in a
quote from noted management guru Rosabeth Moss Kanter2 who stated that, ―being a good partner
has become a key corporate asset; in the global economy, a well-developed ability to create and
sustain fruitful collaborations gives companies a significant leg up.‖
Logistics Relationship:
Types of Relationships:
Generally, there are two types of logistics relationships. The first is what may be termed vertical
relationships; these refer to the traditional linkages between firms in supply chain such as retailers,
distributors, manufacturers, and parts and materials suppliers. These firms relate to one another in
the ways that buyers and sellers do in all industries, and significant attention is directed toward
making sure that these relation¬ships help to achieve individual firm and supply chain objectives.
Logistics service providers are involved on a day-to-day basis as they serve their customers in this
traditional, vertical form of relationship.
The second type of logistics relationship is horizontal in nature and includes those business
agreements between firms that have ―parallel‖ or cooperating positions in the logistics process. To
be precise, a horizontal relationship may be thought of as a service agreement between two or more
independent logistics provider firms based on trust, cooperation, shared risk and investments, and
following mutually agreeable goals. Each firm is expected to contribute to the specific logistics
services in which it specializes, and each exercises control of those tasks while striving to integrate its
services with those of the other logistics providers. An example of this may be a transportation firm
that finds itself working along with a contract warehousing firm to satisfy the needs of the same
customer. Also, cooperation between a third-party logistics provider and a firm in the software or
information technology business would be an example of this type of relationship. Thus, these
parties have parallel or equal relationships in the logistics process and likely need to work together in
appropriate and useful ways to see that the customer‘s logistics objectives are met.
Intensity of Involvement
The range of relationship types extends from that of a vendor to that of a strategic alliance. In the
context of the more traditional -vertical‘ con¬text, a vendor is represented simply by a seller or
provider of a product or service, such that there is little or no integration or collaboration with the
buyer or purchaser. In essence, the relationship with a vendor is ―transactional,‖ and parties to a
vendor relationship are said to be at ―arm‘s length‖ (i.e., at a significant distance). The analogy of
such a relationship to that experienced by one who uses a ―vending‖ machine is not inappropriate.

While this form of relationship suggests a relatively low or non-existent level of involvement between
the parties, there are certain types of transactions for which this option is desirable. One-time or
even multiple purchases of standard products and/or services, for example, may suggest that an
―arm‘s length‖ relationship would be appropriate.
Alternatively, the relationship suggested by a strategic alliance is one in which two or more business
organizations cooperate and willingly modify their business objectives and practices to help achieve
long-term goals and objectives. The strategic alliance by definition is more strategic in nature and is
highly relational in terms of the firms involved. This form of relationship typically benefits the
involved parties by reducing uncertainty and improving communication, increasing loyalty and
establishing a common vision, and helping to enhance global performance. Alternatively, the
challenges with this form of relationship include the fact that it implies heavy resource commitments
by the participating organizations, significant opportunity costs, and high switching costs.
Leaning more toward the strategic alliance end of the scale, a partnership represents a customized
business relationship that produces results for all parties that are more acceptable than would be
achieved individually. Partnerships are frequently described as being ―collaborative‖. Note that the
range of alternatives suggested in Figure 5-1 is limited to those that do not represent the ownership
of one firm by another (i.e. vertical integration) or the formation of a joint venture, which is a unique
legal entity to reflect the combined operations of two or more parties. As such, each represents an
alternative that may imply even greater involvement than the partnership or strategic alliance.
Considering that they rep¬resent alternative legal forms of ownership, however, they are not
discussed in detail at this time.
Regardless of form, relationships may differ in numerous ways. A partial list of these differences
follows:
 Duration.
 Obligations.
 Expectations.
 Interaction/Communication.
 Cooperation.
 Planning.
 Goals.
 Performance analysis.
 Benefits and burdens.
In general terms, most companies feel that there is significant room for improvement in terms of the
relationships they have developed with their supply chain partners. The content of this chapter
should help to understand some key ways in which firms may improve and enhance the quality of
relationships they experience with other members of their supply chains.

Model for Developing and Implementing Successful Supply Chain
Relationships:
For purposes of illustration, let us assume that the model is being applied from the perspective of a
manufacturing firm, as it considers the possibility of forming a relationship with a supplier of logistics
services.
Step 1: Perform Strategic Assessment
This first stage involves the process by which the manufacturer becomes fully aware of its logistics
and supply chain needs and the overall strategies that will guide its opera-lions. Essentially, this is
what is involved in the conduct of a logistics audit‘ The audit provides a perspective on the firm‘s
logistics and supply chain activities, as well as developing a wide range of useful information that will
be helpful as the opportunity to form a supply chain relationship is contemplated. The types of
information that may become available as a result of the audit include the following:
 Overall business goals and objectives, including those from a corporate, divisional, or logistics
perspective.
 Needs assessment to include requirements of customers, suppliers, and key logistics providers.
 Identification and analysis of strategic environmental factors and industry trends.
 Profile of current logistics network and the firm‟s positioning in respective supply chains.
 Benchmark, or target, values for logistics costs and key performance measurements.
 Identification of “gaps” between current and desired measures of logistics performance (qualitative and
quantitative).
Given the significance of most logistics and supply chain relationship decisions, and the potential
complexity of the overall process, any time taken at the outset to gain an understanding of one‘s
needs is well spent.
Step 2: Decision to Form Relationship
Depending on the type of relationship being considered by the manufacturing firm under
consideration, this step may take on a slightly different decision context. When the decision relates
to using an external provider of logistics services (e.g., trucking firm, express logistics provider, third-
party logistics provider), the first question is whether or not the provider‘s services will be needed. A
suggested approach to making this decision is to make a careful assessment of the areas in which
the manufacturing firm appears to have core competency. For a firm to have core competency in any
given area, it is necessary to have expertise, strategic fit, and ability to invest. The absence of any one
or more of these may suggest that the services of an external provider are appropriate.

If the relationship decision involves a channel partner such as a supplier or customer, the focus is not
so much on whether or not to have a relationship but on what type of relationship will work best. In
either case, the question as to what type of relationship is most appropriate is one that is very
important to answer. Lambert, Ernmelhainz, and Gardner have conducted significant research into
the topic of how to determine whether a partnership is warranted and, if so, what kind of partnership
should be considered.3 Their partnership model incorporates the identification of ―drivers‖ and
―facilitators‖ of a relationship; it indicates that for a relationship to have a high likelihood of success,
the right drivers and facilitators should be present.
Drivers are defined as ―compelling reasons to partner.‖ For a relationship to be successful, the theory
of the model is that all parties ―must believe that they will receive significant benefits in one or more
areas and that these benefits would not be possible without a partnership.‖ Drivers are strategic
factors that may result in a competitive advantage and may help to determine the appropriate type
of business relationship. Although other factors may certainly be considered, the primary drivers
include the following:
 Asset/Cost efficiency.
 Customer service.
 Marketing advantage.
 Profit stability/Growth.
Facilitators are defined as ―supportive corporate environmental factors that enhance partnership
growth and development.‖ As such, they are the factors that, if present, can help to ensure the
success of the relationship. Included among the main types of facilitators are the following:
 Corporate compatibility.
 Management philosophy and techniques.
 Mutuality of commitment to relationship formation.
 Symmetry on key factors such as relative size, financial strength, and so on.
In addition, a number of additional factors have been identified as keys to successful relationships.
Included are factors such as exclusivity, shared competitors, physical proximity, prior history of
working with a partner or the partner, and a shared high-value end user.
Step 3: Evaluate Alternatives.
Although the details are not included here, Lambert and his colleagues suggest a method for
measuring and weighting the drivers and facilitators that we have discussed. Then, they discuss a
methodology by which the apparent levels of drivers and facilitators may suggest the most
appropriate type of relationship to consider. If neither the drivers nor the facilitators seem to be

present, then the recommendation would be for the relationship to be more transactional, or ―arm‘s
length‖ in nature. Alternatively, when all parties to the relationship share common drivers, and when
the facilitating factors seem to be present, then a more structured, formal relationship may be
justified.
In addition to utilization of the partnership formation process, it is important to conduct a thorough

assessment of the manufacturing company‘s needs and priorities in comparison with the capabilities
of each potential partner. This task should be supported with not only the availability of critical
measurements and so on, but also the results of personal interviews and discussions with the most
likely potential partners. Although logistics executives and managers usually have significant
involvement in the decision to form logistics and supply chain relationships, it is frequently
advantageous to involve other corporate managers in the overall selection process. Representatives
of marketing, finance, manufacturing, human resources, and information systems, for example,
frequently have valuable perspectives to contribute to the discussion and analysis. Thus, it is
important to ensure a broad representation and involvement of people throughout the company in
the partnership formation and partner selection decisions.
Step 4: Select Partners.
While this stage is of critical concern to the customer, the selection of a logistics or supply chain
partner should be made only following very close consideration of the credentials of the most likely
candidates. Also, it is highly advisable to interact with and get to know the final candidates on a
professionally intimate basis. As was indicated in the discussion of Step 3, a number of executives will
likely play key roles in the relationship formation process. It is important to achieve consensus on the
final selection decision to create a significant degree of ―buy-in‖ and agreement among those
involved. Due to the strategic significance of the decision to form a logistics or supply chain
relationship, it is essential to ensure that everyone has a consistent understanding of the decision
that has been made and a consistent expectation of what to expect from the firm that has been
selected.
Step 5: Structure Operating Model.
The structure of the relationship refers to the activities, processes, and priorities that will be used to
build and sustain the relationship. As suggested by Lambert and his colleagues, components ―make
the relationship operational and help managers create the benefits of partnering.‖5 Components of
the operating model may include the following.
 Planning.
 Joint operating controls.
 Communication.
 Risk/Reward sharing.
 Trust and commitment.

 Contract style.
 Scope of the relationship.
 Financial investment.
Step 6: Implementation and Continuous Improvement
Once the decision to form a relationship has been made and the structural elements of the
relationship identified, it is important to recognize that the most challenging step in the relationship
process has just begun. Depending on the complexity of the new relationship, the overall
implementation process may be relatively short, or it may be extended over a longer period of time.
If the situation involves significant change to and restructuring of the manufacturing firm‘s logistics
or supply chain network, for example, full implementation may take longer to accomplish. In a
situation where the degree of change is more modest, the time needed for successful
implementation may be abbreviated.
Finally, the future success of the relationship will be a direct function of the ability of the involved
organizations to achieve both continuous and breakthrough improvement. A number of steps should
be considered in the continuous improvement process. In addition, efforts should be directed to
creating the breakthrough, or ―paradigm-shifting,‖ type of improvement that is essential to enhance
the functioning of the relationship and the market positioning of the organizations involved.
Need for Collaborative Relationship
Whether the relationship may or may not be with a provider of logistics services, today‘s supply
chain relationships are most effective when collaboration occurs among the participants who are
involved. Collaboration may be thought of as a ―business practice that encourages individual
organizations to share information and resources for the benefit of all.‖ According to Dr. Michael
Hammer, collaboration allows companies to leverage each other on an operational basis so that
together they perform better than they did separately.‖ He continues by suggesting that
collaboration becomes a reality when the power of the Internet facilitates the ability of supply chain
participants to read - transact with each other and to access each other‘s information.
While this approach creates a synergistic business environment in which the sum of parts is greater
than the whole, it is not one that comes naturally to most organized particularly those offering
similar or competing products or services. In terms of an example, consider that consumer products
manufacturers sometimes go to great lengths to make sure that their products are not transported
from plants to customers‘ distribution centers with products of competing firms. While this part is =
have a certain logic, a willingness of the involved parties to collaborate and share resources can
create significant logistical efficiencies. Also, it makes sense, considering -entailers routinely
commingle competing products as they are transported from distribution centers to retail stores.
When organizations refuse to collaborate, real losses may easily outweigh perceived gains.

The contemporary topic of importance is ―collaboration.‖ Most simply, collaboration occurs when
companies work together for mutual benefit. Since it is difficult to imagine very many logistics or
supply chain improvements that involve only one firm, the need for effective relationships is obvious.
Collaboration goes well beyond vague expressions of partnership and aligned interests. It means that
companies leverage each other on an operational basis so that together they perform better than
they did separately. It creates a synergistic business environment in which the sum of the parts is
greater than the whole. It is a business practice that requires the following:
 Parties involved to dynamically share and interchange information.

 Benefits experienced by parties to exceed individual benefits.
 All parties to modify their business practices.
 All parties to conduct business in a new and visibly different way.
 All parties to provide a mechanism and process for collaboration to occur.

Operations and Supply Chain Management
Introduction
Demand for many products changes frequently from period to period, often because of a predictable
influence. These influences include seasonal factors that affect products (e.g., lawn mowers and ski
jackets), as well as non-seasonal factors (e.g., promotions or product adoption rates) that may cause
large, predictable increases or declines in sales.
Predictable variability is change in demand that can be forecasted. Products that undergo this type
of change in demand create numerous problems in the supply chain, ranging from high levels of
stock outs during peak demand periods to high levels of excess inventory during periods of low
demand. These problems increase the costs and decrease the responsiveness of the supply chain.
Supply and demand management through sales and operations planning (S&OP) can significantly
improve performance when applied to predictably variable products.
Faced with predictable variability, a company's goal is to respond in a manner that balances supply
with demand to maximize profitability. The goal of sales and operations planning is to appropriately
combine two broad options to handle predictable variability:
 Manage supply using capacity, inventory, subcontracting, and backlogs

 Manage demand using short-term price discounts and promotions
The use of these tools enables the supply chain to increase profitability, because supply and demand
are matched in a more coordinated fashion. One way requires a manufacturer to carry enough

manufacturing capacity to meet demand from production in any period. The advantage of this
approach is that manufacturer incurs low inventory costs because no inventory is carried from period
to period. The disadvantage, however, is that much of the expensive capacity is unused during most
months, when demand is lower.
Another approach to meeting demand is to build up inventory during the off-season to keep
production stable year round. The advantage of this approach lies in the fact that Red Tomato can
get by with a lower capacity, less expensive factory. High inventory carrying costs, however, make
this alternative expensive. A third approach is for the manufacturer to work with its retail partners in
the supply chain to offer a price promotion before the spring months, during periods of low demand.
This promotion shifts some of the spring demand forward into a slow period, thereby spreading
demand more evenly throughout the year and reducing the seasonal surge. Such a demand pattern
is less expensive to supply. The manufacturer needs to decide which alternative maximizes its
profitability through its S&OP process.
Often companies divide the task of supply and demand management into different functions. Sales
typically manages demand, while operations manages supply. At a higher level, supply chains suffer
from this phenomenon as well, with retailers managing demand independently and manufacturers
managing supply independently. Lack of coordination hurts supply chain profits when supply and
demand management decisions are made independently. Therefore, supply chain partners must
work together across enterprises to coordinate these decisions and maximize profitability. The S&OP
process facilitates such coordination. We illustrate the value of this coordination through further
discussion of Red Tomato.
Operations Planning and Control Steps
The basic steps in operations planning and control can be summarized as follows. (Some terms
described below are defined later.)
 Demand history data are gathered and cleansed. A statistical forecast is run and analyzed for events or
outliers that are not expected to repeat in the future.
 The statistical forecast with associated errors is reviewed with the product and brand management,
marketing, and sales teams. The teams add information to the demand plan that will improve forecast
accuracy.
 The demand plan is finalized with the demand-side teams and passed on to supply.
 The supply team reviews the demand plan and constrains it based on capacity availability.
 Both supply and demand review the constrained plan with the finance team and executive
management.
 When the executive S&OP meeting is held, the result is the communication of a single plan: sales sells
to the plan and supply produces to the plan.
 The output of S&OP is the production plan, which provides the rate of production at the family level.
Resource requirements are evaluated with the resource plan.

 The production plan is the input to master scheduling and its output, the master production schedule.
The MPS is typically a weekly plan at the item level with an evaluation of capacity through rough-cut
capacity planning.
 Then materials requirement planning uses bill of material data, inventory data, and the master
production schedule to calculate requirements for materials, resulting in planned production and
purchase orders.
 Production activity control receives the output of MRP and detail planning, and final assembly
scheduling is done
The strategic activities of business planning, resource planning, and S&OP are discussed in more
detail next.
Business Planning
The business plan is a thorough and disciplined preview of what the firm hopes to accomplish with
its products and services over the long term, with emphasis on the plan year. The business plan is
typically stated in dollars and grouped by product family. There may be overly optimistic projections
from marketing at some points, but the numbers are there for later review as well as to specify
projected revenues, costs, profits, and objectives for the product families—all to support the long-
range strategy proposed for entering the marketplace. Key inputs to the business plan include the
demand plan and its long-term forecasts. Budgets and projected financial statements are key
outputs.
A business plan should do the following things:
 Clarify strategy by stating an explicit vision for the business—a reason for being.
 Provide a point of reference for developing the sales and operations plan.
 Describe long-term strategies that will be used to guide shorter-term tactical plans for producing and
selling the product.
The next steps after the business plan are development of a long-term resource plan and a near-
medium-term sales and operations plan based on the longer term views of the business plan. It‘s
time to start investing in capacity and then using that capacity to make money and provide the
lenders and investors with the return on investment (ROI) they anticipated when they signed on as
financial partners in the enterprise.
Resource Planning
Resource planning, sometimes called resource requirements planning, takes the longest view of the
system‘s capacity, typically going out 15 to 18 months but sometimes requiring much longer
planning horizons for capital investments. Resource planning is defined as:
Capacity planning conducted at the business and production plan levels. The process of establishing,

measuring, and adjusting limits or levels of long-range capacity. Normally based on the production
plan but may be driven by higher-level plans beyond the time horizon for the production plan, e.g.,
the business plan. It addresses those resources that take long periods of time to acquire.
The duration of the planning horizon depends on the lead time of the needed resources, which may
be a machine to produce the planned product. The total lead time needed would include not only
installation time but also the lead time needed to conduct operations. Equipment or facility
construction with long development lead times may be driven primarily by the business plan, while
realigning existing facilities and the workforce to change capacity is more likely to be based on the
production plan generated during the S&OP process. Note that capital expenditures in facilities or
expensive equipment is an executive-level decision, while the resource planning that is based on the
production plan is more likely to be a supply chain management decision. Resource planning is
revisited later in the discussion of capacity.
Sales and Operations Planning (S&OP)
Sales and operations planning, which we first looked at in Section A regarding using its meetings to
synchronize supply and demand, is discussed further in this section, with an emphasis on the overall
S&OP functions and process.
Like supply chain management, sales and operations planning rests on the assumption that firms
wishing to compete in the expanding global marketplace can and must break down the silo walls
between functions and break through the barriers separating supply chain partners. In fact, S&OP is
intended to be a planning and controlling tool not just for manufacturing but also for the entire
enterprise. Breaking down those barriers, however, doesn‘t always happen quickly and easily.
The most important consideration is the understanding that the plan to generate enough capacity to
match supply with aggregate demand must be created, executed, and monitored in collaboration
with sales and other functional areas, not in isolation.
The following aspects of S&OP are explained next:
 S&OP functions
 The S&OP process
 Contributions to S&OP
Sales and Operations Functions
Functional areas within a company and supply chain partners on the outside are accustomed to
developing their own plans, controlling their own information, and determining their own actions.
S&OP can‘t function if those assumptions, and those barriers, remain in place.

The basic premise of S&OP is that there should be one plan to unite all the major functions—sales,
operations, and finance. Further, S&OP assumes that key players, including executives, will agree to
the unified plan, carry it out tactically, and continuously monitor and adjust it in monthly S&OP
meetings. As S&OP consultant and author Thomas F. Wallace puts it, ―S&OP is as much about
institutionalizing communications throughout the organization as it is anything else.‖ If, as Wallace
states, you ―get all the facts on one sheet of paper‖ reviewed jointly by the key players monthly,
communication has to happen, facts have to be recognized, even if they are negative, and decisions
have to made, debated, and acted upon—before the next meeting.
S&OP stands both for the sales and operations plan and sales and operations planning. It is both a
plan and the process that creates, implements, monitors, and continuously improves the plan. S&OP
is all of the following.
 Link between business planning and tactics. S&OP forms a link between the vision in the strategic and
business plans on the sales side and the practical details of the tactical plans on the operations side.
The executives of the company are responsible to investors and to one another for making the
projections in the business plan a reality. S&OP brings the executives directly into the planning process.
 Provides opportunities to be proactive rather than reactive. The monthly meeting is a chance for
executives to respond to changes in economic trends and market conditions as they are occurring.
 Definitive short-to medium-term plan. The sales and operations plan is the definitive statement of
company plans for the near to intermediate term—typically 12 to 18 months or more. It covers enough
time to enable planning for resources and to support the annual long-range business planning process.
 Unified, cross-functional plan and process. S&OP brings together a planning team that reconciles all of
the functional business plans—not just sales plans and marketing plans, but engineering and
development, manufacturing, sourcing, and financing plans—into one unified plan and one unified
process.
 Bridge between customer value and supply chain efficiency. The S&OP process integrates the tactical
focus of the operations side with the customer orientation of the marketing and sales side. There is an
inherent tension between the needs of the customer and the evolving quality standards of the supply
chain. Reducing cycle times, squeezing out unnecessary inventory, paring down the number of partners,
practicing lean manufacturing, and focusing relentlessly on quality may result in a swifter, more agile
supply chain, but that can come at the expense of the end customer if marketing isn‟t there to keep a
close eye on the final product. In common terms, cheaper and faster are not always better from the
customer‟s perspective. After all, quality is “conformance to requirements or fitness for use.” Nor, on the
other hand, is the perfect product always affordable from an operational standpoint. S&OP integrates
the sales and marketing perspective with the operational perspective so the inherent tension between
the two can become a creative force that drives the business.
 Incentive to engage in continuous improvement. Not merely a plan, S&OP‟s (usually) monthly meetings
incorporate replanning from prior months. This continuous review and improvement should incorporate
appropriate metrics for evaluating results against plans.
All functional areas involved in the sales and operations planning process should submit annual
budgets for review by finance. The final plan should merge and reconcile all functional area plans
and be reviewed by senior management. Budgeting is part of the annual update of the business plan.

S&OP Process
S&OP culminates in a monthly executive meeting to get agreement on a plan to balance supply with
demand, but it requires two weeks or more of team member preparations and preliminary meetings.
S&OP can be run on a different timetable, but monthly data collection, analysis, and meetings are
typical.
Wallace created a five-step S&OP process, which is presented next in more detail. Note that the
additional meetings discussed by Crum (product review and financial review) may also occur, but to
keep the steps consistent with Wallace the product review is discussed as part of the demand
planning phase and the financial review is discussed as part of the supply planning phase, though
each could be considered to be separate steps. The monthly S&OP process includes the following
steps to review the data and make course corrections as necessary:
Step 1:
Data gathering. Shortly after the end of the month, all the files necessary to develop the new
statistical forecast should be updated. This needs to be done quickly to keep the process moving
ahead on time. However, timing the S&OP process to begin after the best data are available each
month is a best practice.
Step 2:
The demand planning phase. Product and brand management, marketing, and sales representatives
review the data and issue an updated medium-term demand plan for current and new products. The
demand plan should be reviewed by a senior sales and marketing executive before being entered in
the S&OP files. Sometimes this process is called a marketing/ sales handshake because it requires
coming to an agreement on a request for product and coordinated demand-influencing activities.
The product and demand review meetings discussed in the prior section occur as part of this
process.
Step 3:
The supply planning phase (capacity). Based on the demand plan, the supply management team may
alter the production plan and revise the S&OP data to meet the demand plan as closely as possible.
The role of the supply management team is to identify any constraints that would prevent operations
from being able to satisfy the demand plan. This process is sometimes called the operations
handshake because it requires operations professionals to agree on production plan

recommendations that could best fulfill the demand plan while keeping operations profitable. The
supply review meeting is used to finalize supply plan recommendations. Based on the demand plan
and any alternative supply plans, financial professionals review the demand plan and any alternative
supply plans to determine the financial feasibility of meeting the plans and assess how well the plans
fulfill the business plan goals. Finance meets in a financial review meeting to recommend the plan
that best meets financial goals.
Step 4:
The pre-meeting. Key players assemble to review the data and set the agenda for the final step, the
executive S&OP meeting. Team members at the pre-meeting typically include people from prior
steps, at least one person from the finance area, and the S&OP process owner, the demand manager.
Other pre-S&OP team members might include a number of key supply chain managers and other
area managers, such as the plant manager, the logistics manager, the product and brand manager,
the customer service manager, and the accounting manager. Again, the purpose of this step is to
identify areas where consensus can be reached without needing executive input and to add the more
contentious items to the executive review agenda.
Step 5:
The executive meeting. The monthly executive meeting should include the CEO and vice presidents
from operations, sales, marketing, finance, and so on. The purpose of this meeting is to provide
executives with a broad understanding of supply and demand issues and to allow them to exercise
control over the organization‘s direction if it is not in line with business plan goals.
The assembled executives may accept the decisions and the numbers forwarded from the pre-S&OP
meeting, or they may take another path. They will make decisions pertaining to each product family,
authorize any decisions with significant financial implications, and compare the demand plan to the
business plan to see if actions need to be taken to bring them in line with each other (e.g., additional
marketing activities).
Contributions to S&OP
Sales and operations planning approaches tactics at the level of aggregate supply and demand. It
deals with overall capacity in the system, gross volumes, and product families. Families are ―a group
of end items whose similarity of design and manufacture facilitates their being planned in aggregate,
whose sales performance is monitored together, and, occasionally, whose cost is aggregated at this
level.‖ Thus this level of planning is at a higher level than individual products and specific work

centers. The mission of S&OP is to keep supply and demand in balance, and this balancing act starts
at the level of product families.
The specific contributions to S&OP represent the demand side, where sales and marketing take
responsibility; the supply side, where operations does the capacity research; and finance, which does
the financial goals analysis. The results are merged and reconciled so that aggregate demand and
supply are in balance and meet business and financial goals to the extent possible.
Product and Brand Management, Marketing and Sales

Contributions
The following contributions go into the planning process from the demand organization for review
by the full team:
 Demand forecasts. S&OP receives time-phased (e.g., demand per month) forecasts of expected demand
(customer orders) arranged by product family.
 Demand plan commitments. Product and brand management, marketing, and sales are responsible for
developing and implementing realistic strategies and tactics to achieve the goals and revenue
objectives stated in the business plan—for the near and medium term. For example, product and brand
management may plan new product launches and determine life cycle impacts of events. Marketing
sets pricing strategies and performs competitive analysis. Sales strategy includes number and type of
salespeople, sales territories (by geography, product, customer type, etc.), and sales and marketing
approaches.
 Demand plan numbers and assumptions. Along with customer order forecasts and commitments to
action, the demand organization contributes estimates of the results of their efforts expressed both in
the units (e.g., volume, numbers, weights) and the revenue dollar equivalents, along with all underlying
assumptions.
 Market analysis. Marketing contributes research and analysis of market opportunities; selection of
target market segments; development of strategies for capturing a share of those markets; and
development, management, execution, and control of marketing plans, programs, and projects.
Operations Contribution
Operations makes the following contributions to the plan, to be reconciled with the numbers and
strategies from the sales and marketing side:
 Output and resources. Products are grouped into families, with specific output targets for each product
family during the planning horizon (usually 12 to 18 months). These targets include the following:
 Overall level of manufacturing output and other activities to meet planned sales levels (by product
family, not specific product)

 Inventory levels: make-to-stock
 Backlog levels: make-to-order backlog is defined as “all the customer orders received but not yet
shipped; sometimes referred to as open orders or the order board.”)
 Required plant, equipment, labor, and material resources for each period in the plan (resource
planning)
 Product families. For purposes of the S&OP, product families need to be established on the basis of
similar operations capacity requirements: “Like capacity” items are grouped together so that the
resulting production plan can be used directly by operations. While each part of the organization may
create its own product families for internal department planning purposes, such as sales creating
families based on similar market appeal, the integrated nature of the S&OP process requires that
everyone use the same product families.
 Operations constraints. Given a request for product in the form of a demand plan, a primary input from
operations involves evaluating whether there is sufficient capacity over the planning horizon to meet
the plan for each product family. Information on site and work center bottlenecks is provided as needed
to support recommendations. Constraints can sometimes be alleviated by operating above or below
optimal capacity or by altering operations strategies or supply-demand strategies. The latter two are
discussed next.
 Operations strategies. The level of output for periods in the plan can be determined according to a level
production strategy, a chase production method (also called a chase strategy or chase-demand
matching), or a hybrid of the two.
 A level production strategy aims for the same output in each period (e.g., each month). The level
amount is based on the average of demand forecasts for each period with some modifications for
desired inventory levels. For example, Porta Potty, a portable outhouse manufacturer, has seasonal
demand spikes but produces the same number of units all year round. Leveling offers the benefits of
simplicity and, from operations‟ viewpoint, predictability (no last-minute hiring of temps or layoffs). The
tradeoff is the potential for inventory to pile up during periods of low demand or for stockouts if
demand spikes upward.
 A chase production method is defined as “a production planning method that maintains a stable
inventory level while varying production to meet demand.” This results in demand matching, which
aims to match production to demand for each period. For example, restaurants often use chase
methods by maintaining a part-time workforce that can be scheduled as needed and altering purchases
based on projected demand. Manufacturers sometimes pursue this method by producing different
goods for different seasons (e.g., K2 produces skis and in-line skates).
The benefit, if the strategy succeeds in producing only what is demanded, is a reduction of inventory
costs. On the negative side, resources must be ramped up during periods when demand is high, with
increases in costs for overtime, additional hiring, training, etc. Layoffs may be necessary when
demand falls, resulting in loss of competent, trained workers who may not be available for rehiring
when demand picks up again. Finally, plant capacity has to be built up to produce at the highest level
of demand rather than at an average level.
 A hybrid strategy combines elements of level and chase production to keep the plant running near full
capacity for part of the cycle, allowing inventory to build up, and then slows or shuts down to allow the
inventory to shrink as customers buy the product. A large number of organizations use hybrid

strategies. For example, Lego manufactures toy building blocks using one shift for the first half of the
year and adds another shift in the second half of the year for holiday season demand.
 Supply-demand strategies. For each product family there should exist one of three operational
approaches for determining when to produce the product in relationship to customer orders (that is,
before or after the order). The three strategies are make-to-stock, make-to-order, and assemble-to
order:
o The make-to-stock approach is defined as follows:
 A production environment where products can be and usually are finished before receipt of a customer
order. Customer orders are typically filled from existing stocks, and production orders are used to
replenish those stocks.
 This is essentially a mass-market strategy that works well when demand is stable and products turn
over rapidly. For slower-moving products or products with unstable demand, the risk here is inventory
build-up and, in some cases, product obsolescence. In the computer industry, for instance, components
age rapidly toward obsolescence.
 The make-to-order approach is defined as follows:
o A production environment where a good or service can be made after receipt of a customer‟s order. The
final product is usually a combination of standard items and items custom-designed to meet the special
needs of the customer
o This is suitable for custom work. If delivery lead time is not an issue, the product can be tailored to a
customer‟s exact specifications
 A similar approach to make-to-order is engineer-to-order (or design-to-order). Engineer-to-order
products are defined as follows:
o Products [that] require unique engineering design, significant customization, or new purchased
materials, depending on customer specifications. Each customer order results in a unique set of part
numbers, bills of material, and routings.
 Assemble-to-order (or finish-to-order) is “a production environment where a good or service can be
assembled after receipt of a customer‟s order.” In addition, package-to-order is “a production
environment in which a good or service can be packaged after receipt of a customer order.” Assemble-
to-order products are partially manufactured and inventoried to await orders. This allows mass
customization of products without long lead times and works well with products that can be tailored to
customer taste by exchanging a limited number of modular components. A computer, for example, can
be assembled from standard—but highly varied—components. The focus of master scheduling is then
on scheduling the manufacture of the modules or components and on final assembly. One of the
challenges of the assemble-to-order approach is the need to have “reasonably skilled” labor to do the
assembly. Distribution centers are not always eager to train or hire workers to do assembly.
 Actual results and other data for performance metrics. The supply organization provides data on actual
production amounts per product family and other historical data such as information on actual
capacity limits versus planned limits. They may also provide other data for planning and feedback
purposes such as changes to inventory metrics.

Finance Contributions
As stated in Section A, finance reviews the demand plan and the proposed production plan for
financial feasibility and fit with business plan goals (especially financial goals) and may make a
recommendation on the plan that makes the most financial sense if competing alternatives exist.
With its focus on breaking through functional barriers, the S&OP approach to aggregate planning
integrates perfectly with supply chain management thinking. Instead of the traditional practice of
first developing a sales plan and then asking operations to develop tactics to implement it, S&OP
brings together sales, marketing, operations, finance, and other key players to produce an integrated
plan that incorporates and reconciles the views of all functional areas.

Global Supply Chain Management

Globalization is defined as ―the interdependence of economies globally that results from the growing
volume and variety of international transactions in goods, services, and capital, and also from the
spread of new technology.‖
Globalization and supply chain management influence each other. The World Is Flat author and
journalist Tom Friedman explains why and how globalization has shifted into warp drive, pointing to
supply chains as one of the factors making the world ―flat.‖ What he means by ―flat‖ is ―connected‖
and how the lowering of trade and political barriers as well as the incredible technical advances of
the digital revolution have made it possible to do business and communicate nearly instantaneously
with millions around the globe. In this section we‘ll first look at the ways that this flattening impacts
globally dispersed supply and demand. We‘ll describe the players in cross-border trading, some of
the rules and risks of the export-import game, free trade zones, and trading blocs. We‘ll conclude our
discussion with the operational considerations as well as the implications of being a respected global
supply chain participant that operates with integrity.
Global Supply Chains
There is discussion surrounding globalization and its effects on business, and there is no doubt that
supply chain competitors are increasingly going head to head on a worldwide playing field.
Competing in supply networks that cross borders adds a set of problems when compared to doing
business in one market where competitors play by the same rules, invoice and pay in the same
currency, communicate in the same language, and pay roughly the same rates for labor, supplies,
and raw materials. It is also possible to overplay the novelty of the situation.

Trade has been international roughly since the invention of the oceangoing vessel, if not since the
onset of the camel caravan or roaming of nomadic tribes. Moreover, there is more effort being made
now to normalize cross-border trading than ever before, with international rule-making bodies and
regional trade agreements. But the speed at which the game is played has increased exponentially in
this age of the Internet, jets, and nearly instantaneous global connectivity. In the I700s, when the
British shipped tea to their colonies, the product and its carrier were out of touch for weeks while
management back home waited for news. Now, with global positioning, bar coding, and satellite
communications, every item on board every ship or plane can be tracked every minute of the day or
night. Computer software coordinates transportation using multiple carriers and multiple modes.
And computer optimization models crunch the numbers on all sorts of international variables to
guide warehouse site selection. Automation, computerization, and electronic information technology
all work together to keep tighter control on costs, reduce lead times, and make international supply
chains an inevitable fact of competitive life.
It is now possible to place manufacturing outside one‘s home country if local costs and conditions
indicate that such a move will be profitable. Assembly, of course, can be done many thousands of
miles/kilometers and several borders away from the manufacture of components to fit specifications
of regional markets. Meanwhile, purchasing can compare the prices for source materials around the
globe (taking into account all the costs involved in getting the materials and components from the
source to the manufacturer). Goods can be shipped to warehouses anywhere using various
combinations of vehicles owned and operated by transport specialists for whom the whole world is
home. All these things are possible. But that means that all these things are rapidly - becoming
necessary as well. What works for my competitor‘s company becomes a necessity for mine.
Next we‘ll look at the intermediaries involved in global supply chains.
Managing the Global Supply Chain
International commerce takes place between an exporter (the seller) and an importer (the buyer or
customer). A number of intermediaries may perform one or more specialized services before the
items sold in one country arrive at the customer‘s dock in another. In the last module, we discussed
the growing use of logistics specialists to carry out specific operations for a client firm (3PLs) or to
coordinate the entire logistics function (4PLs). The use of specialized logistics intermediaries is even
more common in the export-import business than in domestic supply chains. There are simply many
more issues to contemplate when you send a product across borders into countries with different
rules, different currency, and a different language. And so it may be cost-effective for a company
sending, or receiving, an international shipment to pay out considerable sums in fees or commissions
to acquire these services.
The following are some of the titles and job descriptions of the intermediaries who assist in getting
cargo across borders and through customs. We‘ll explore the roles of the following:

 Freight forwarders
 Non-vessel operating common carriers (NVOCCs)
 Consolidators
 Customs house brokers
 Export management companies (EMCs) and export trading companies (ETCs)
 Shipping associations
 Ship brokers and ship agents
 Export packing companies
Freight Forwarders
The freight forwarder, foreign freight forwarder, or just plain forwarder is a firm that arranges
transportation for commercial cargo. A freight forwarder is defined as ―the ‗middle man‘ between the
carrier and the organization shipping the product, often combining] smaller shipments to take
advantage of lower bulk costs.‖ A foreign freight forwarder is
―an entity that picks up goods at the production site and coordinates transport to the foreign
customer‘s location.‖ Foreign freight forwarders are not themselves carriers, nor do they buy and
resell space on carriers. They are, instead, independent agents, regulated in the United States by the
Federal Maritime Commission.
A great majority of international shippers use forwarders. Small companies use them because they
can‘t afford to maintain a staff with the expertise required to handle foreign shipping and also
because one of the forwarder‘s functions is to consolidate smaller shipments into larger ones that
qualify for discounts. But even large companies use forwarders, because they can benefit from the
expertise of such specialists. Thousands of forwarders operate around the world, so there are plenty
for logistics managers to select from.
Forwarders may perform quite a number of different functions in the course of shepherding goods
across international borders, including the following:
 Quoting carrier rates

 Arranging charters or booking vessel space
 Preparing and presenting documents
 Obtaining insurance
 Handling payments
 Translating
 Tracing and expediting shipments
 Arranging inland transportation

Although forwarders must be licensed by the government in the United States, they are not subject
to certification requirements. However, certification is available for ocean forwarders from the U.S.
National Customs Brokers and Forwarders Association, which will designate someone as a ―Certified
Ocean Forwarder‖ based upon a combination of experience and passing a certification exam.
Airfreight forwarders may be either independent contractors or affiliated with a single air carrier.
They require neither licensing nor certification. However, they may obtain certification from the U.S.
Federal Aviation Administration (FAA). Clients generally prefer to work only with FAA-certified
airfreight forwarders.
The primary job of the airfreight forwarder is consolidation of small shipments for presentation to an
air carrier. They also offer the following services:
 Preparing and presenting documents

 Coordinating ground transport and warehousing
 Tracing and expediting shipments
 Publishing tariffs and issuing air bills
 Assuming liability for damage to shipments
A major source of competition for airfreight forwarders comes from the carriers themselves, who can
work directly with shippers. Firms like FedEx and UPS Air also compete with forwarders for small
shipments.
Forwarders derive income from a combination of fees, markups, and commissions from carriers.
NVOCCs
A common carrier is ―transportation available to the public [that] does not provide special treatment
to any one party and is regulated as to the rates charged, the liability assumed, and the service
provided. [The common carrier] must have a certificate of public convenience and necessity from the
(U.S.) Federal Trade Commission for interstate traffic.‖ The non-vessel operating common carrier
(NVOCC) buys space on inland carriers and resells it to shippers at a marked-up price. NVOCCs
handle only the part of the shipment traveling from a port to the importer‘s dock or from an
exporter‘s dock to a port.
NVOCCs originated in the United States in the 1970s as a cost-effective alternative to the carriers. At
the time, trains and trucks often returned to port empty after unloading cargo at inland destinations
and charged the shipper for both halves of the round trip—even though the shipper made no money
on the turnaround. The NVOCCs were able to solve the problem by finding cargo for the return trips
to port. Using their own containers for the inland journey, NVOCCs scout around for port-bound
shipments to consolidate into those same containers for the trip back to port. They also provide

container service for trips to and from foreign ports. Both shippers and carriers benefit from the
intermediary work of the NVOCCs. The shippers receive reduced rates; the carriers gain access to a
wider market.
NVOCCs can be distinguished from forwarders in three ways:
 NVOCCs actually buy and resell space on carriers while forwarders do not.
 NVOCCs perform the physical work of consolidating, loading, and unloading cargo (using nonunion
labor to undercut the rates charged by carriers). Forwarders do not provide labor.
 NVOCCs can handle the freight in many cases, such as shipping by a motor freight carrier from
Charlotte to Hawaii.
A freight forwarder could perform those inland functions tor the N VOCC and could very well be a
division of the freight line or their contractor. The NVOCC can arrange for transport. These are
common carriers that do not operate the vessels by which the ocean transportation is provided and
are shippers in their relationship with an ocean common carrier.
Some NVOCCs are affiliated with freight forwarders; some are independent and are therefore able to
work with a variety of forwarders. The independent NVOCCs can offer lower rates than those
affiliated with a forwarder, but the affiliated NVOCC and forwarder can offer door-to-door service.
Though they neither own nor operate vessels, NVOCCs are regulated in the U.S. by the Federal
Maritime Commission, which requires them to publish rates and not discriminate in hiring. However,
they are also subject to different regulations from carriers, and this may put them at a disadvantage.
Under the Ocean Shipping and Reform Act (OSRA) of 1998, for instance, NVOCCs are forbidden to
enter into service agreements with shippers, while carriers are allowed to do so.
Consolidators
The consolidator combines small shipments into larger ones to qualify for full vehicle discounts.
Generally this service is provided to fill containers for intermodal shipment, such as turnarounds
carrying cargo between an inland warehouse and a port.
Consolidators are distinct from NVOCCs, but they may work under them. A consolidator that is not
affiliated with an NVOCC contracts with a forwarder or a carrier to arrange the transportation.
Customs House Brokers
Customs house brokers assist importers by shepherding shipments through customs. Their job is to
ensure that all documentation required to pass customs is complete and accurate.
These days, the information required to clear customs passes through computer interfaces, such as

the Automated Broker Interface System in the United States and the Pre-Arrival Review System
(PARS) in Canada. Replacing paper shuffling with electronic data transfer has shaved considerable
time off the process of getting cargo through customs.
The customs house broker pays all import duties under a power of attorney from the importer.
Liability for any unpaid duties lies with the importer, not the broker.
Export Management Companies (EMCs) and Export Trading

Companies (ETCs)
When companies want to expand from domestic to foreign markets, they may turn for assistance to
foreign trade specialists in either export management companies (EMCs) or export trading
companies (ETCs) rather than adding internal expertise. While there may be some overlap in the
types of services offered by EMCs and ETCs, there is a distinct line between their approaches. The
EMC is generally not an exporter itself but rather a consultant to the exporters that hire it. The ETC,
on the other hand, is itself an exporter rather than a consultant to an exporter.
A common reason to hire an EMC is to acquire representation in a particular market where the EMC
has special knowledge and connections. By working with an EMC, the exporter gains access to
current information about the preferences of consumers in that market and about local customs and
government regulations. Knowledge of local conditions enables an EMC to help the exporter avoid
offending consumers or officials by inadvertent misinterpretations of the culture or the politics of the
importer‘s country. Finally, EMCs often cultivate friendly relationships with host governments, and
this can help ease the exporter‘s goods through customs. EMCs may also buy the exporter‘s goods
and resell them in the foreign market (in the manner of an ETC), but generally they act as a firm‘s
long-term consulting partner, not as a buyer of its products.
An ETC, by contrast, looks for companies making goods that it wants to buy and resell in a foreign
market. Its functions, therefore, may include any or all of the following:
 Locating importers to buy the goods

 Overseeing export arrangements
 Preparing and presenting documentation
 Arranging transportation overseas and inland
 Complying with regulations
More expansively structured ETCs are known as general trading companies. These entities may
comprise banks, steamship lines, warehouses, insurance services, a communications network, and a
sales force. Japan‘s success in international trade has been facilitated by such general trading
companies, known in Japan as ―sogo shosha.‖ These enormous conglomerates are some of the
world‘s highest revenue generators, including familiar names such as Mitsui and Mitsubishi. With

offices in over 100 countries, the sogo shosha handle more than three-fifths of Japan‘s imports and
over one-third of its exports. Other countries with very large general trading companies include
Germany, South Korea, China, and the Netherlands.
Shipping Associations
Smaller exporters band together in shipping associations in an effort to qualify for the rate discounts
that carriers offer to larger shippers. Before deregulation ocean liners were required to publish their
rates. Smaller shippers, seeing the rate schedules, could ask for similar deals. Since deregulation,
carriers and the larger shippers have been able to sign confidential rate agreements. In response
smaller shippers have formed shipping associations—usually nonprofit organizations—to negotiate
with carriers on the same terms as larger shipping firms.
Ship Brokers and Ship Agents
Ship brokers and ship agents assist exporters with the details of arranging ocean transport.
A ship broker is an independent operator that brings exporters together with ship operators that
have appropriate vessels available to carry the shipper‘s freight. With detailed knowledge of carrier
schedules, the broker can help the exporter find a ship that will be in port when its cargo is ready to
travel.
A ship agent works for the carrier rather than being an independent contractor. When a ship is
headed for port, the ship agent arranges for its arrival, berthing, and clearance; while the ship is in
port, the agent coordinates unloading, loading, and fee payment. Shippers contact ship agents for
information about the arrival and availability of ships.
Export Packing Companies
Export packing companies provide the specialized packaging services required for cargo that may
have to undergo long journeys and pass customs inspections in another country.
Hiring a specialist in export packaging provides three advantages for a shipper:
 By choosing the most appropriate materials, the packager can expedite the movement of cargo through
customs.
 Specialized packaging can help exports survive the rough handling and adverse changes in climate that
can occur when cargo travels long distances. The packing company can choose packaging materials
that provide adequate protection with the least bulk and weight.

 In some countries, import duties are based on the weight of the cargo including the packaging, not just
the weight of the goods.

Supply Chain Operations Reference Model
SCOR Definition
Supply-Chain Operations Reference model (SCOR®) is the product of the Supply-Chain Council
(SCC) a global non-profit consortium whose methodology, diagnostic and benchmarking tools
help organizations make dramatic and rapid improvements in supply-chain processes. SCC
established the SCOR process reference model for evaluating and comparing supply-chain
activities and performance.
Supply Chain Model
SCOR captures the Council‘s consensus view of supply chain management. It provides a unique
framework that links business process, metrics, best practices and technology into a unified structure
to support communication among supply chain partners and to improve the effectiveness of supply
chain management and related supply chain improvement activities. SCC membership is open to all
companies and organizations interested in applying and advancing the state-of-the-art in supply-
chain management systems and practices.
Figure: SCOR is organized around five major management processes.
Supply Chain Council
The SCC was organized in 1996 and initially included 69 practitioner companies meeting in an
informal consortium. Subsequently, the companies of the Council elected to form an independent
not for profit trade association. The majority of the SCC‘s members are practitioners and represent a
broad cross-section of industries, including manufacturers, distributors, and retailers. Equally

important to the Council and the advancement of the SCOR-model are the technology suppliers and
implementers, the academicians, and the government organizations that participate in Council
activities and the development and maintenance of the Model. At the time of this release, the
Council has approximately 800 corporate members worldwide and has established international
chapters in Australia/New Zealand, Latin America, Greater China, Europe, Japan, Southeast Asia, and
Southern Africa with additional requests for regional chapters pending.
The Supply-Chain Council is interested in providing the widest possible dissemination of the SCOR-
model. The wide-spread use of the Model results in better customer-supplier relationships, software
systems that can better support members through the use of common measurements and terms,
and the ability to rapidly recognize and adopt best practice no matter where it originates. SCC
requests that all who use the SCOR-model provide attribution to the Supply-Chain Council.
End to End Supply Chain
This introduction is provided to assist new users of the SCOR-model to begin analytic and
implementation projects. It is intended to remind experienced users of the framework and structure
of the Model when tackling more complex applications of the Model for their businesses. Finally, it is
provided to orient members to the changes between Version 9.0 and Version 10.0.
Version 10.0 of the SCOR-model is the twelfth revision since the Model‘s introduction in
1996.xRevisions of the Model are made when it is determined by Council members that changes
should bexmade to facilitate the use of the Model in practice. Specific changes in Version 10.0 are
outlined later in this Introduction.
SCOR Supply Chain
The SCOR-model has been developed to describe the business activities associated with all phases of
satisfying a customer‘s demand. The Model itself contains several sections and is organized around
the five primary management processes of Plan, Source, Make, Deliver, and Return (shown in Figure
1). By describing supply chains using these process building blocks, the Model can be used to
describe supply chains that are very simple or very complex using a common set of definitions. As a
result, disparate industries can be linked to describe the depth and breadth of virtually any supply
chain. The Model has been able to successfully describe and provide a basis for supply chain
improvement for global projects as well as site-specific projects.
It spans: all customer interactions (order entry through paid invoice), all physical material
transactions (supplier‘s supplier to customer‘s customer, including equipment, supplies, spare parts,
bulk product, software, etc.) and all market interactions (from the understanding of aggregate
demand to the fulfillment of each order). It does not attempt to describe every business process or

activity. Specifically, the Model does not address: sales and marketing (demand generation), product
development, research and development, and some elements of post-delivery customer support.
It should be noted that the scope of the Model has changed and is anticipated to change based on
Council member requirements. With the introduction of Return, the Model was extended into the
area of post-delivery customer support (although it does not include all activities in that area).
As shown in Figure, the Model is designed and maintained to support supply chains of various
complexities and across multiple industries. The Council has focused on three process levels and
does not attempt to prescribe how a particular organization should conduct its business or tailor its
systems / information flow. Every organization that implements supply chain improvements using
the SCOR-model will need to extend the Model, at least to Level 4, using organization-specific
processes, systems, and practice.
The Model is silent in the areas of human resources, training, and quality assurance. Currently, it is
the position of the Council that these horizontal activities are implicit in the Model and there are
other highly qualified organizations that are chiefly concerned with how an organization should train,
retain, organize, and conduct their quality programs. Just as the Council recognized the requirements
for marketing and sales in commercial organizations, the Council is not minimizing the importance of
these activities, but they are currently out of scope for SCOR.
SCOR - Model Supply Chain
The Practices section consists of best practices organized by original objective:
 SCOR: Improving overall supply chain operational performance. These best practices focus on the
Reliability, Responsiveness, Agility, Cost and/or Asset Management Efficiency performance attributes.
 GreenSCOR: Improving the environmental footprint of the supply chain.
 Risk Management: Improving (mitigating) the risks of an undesired event taking place, limiting the
impact of such an event and improving the ability to recover from the event.
Best practices are best described as unique ways to configure a set of processes (Configuration),
unique ways to automate a set of processes (Technology) and/or unique ways to perform a set of
processes (Knowledge) that result in significant better results.
No codification exists for Best Practices at this time.
PEOPLE
The People section of SCOR is new. Starting revision 10 SCOR incorporates a standard for describing
skills required to perform tasks and manage processes. Generally these skills are supply chain
specific. Some skills identified may be applicable outside the supply chain process domain.

Skills are described by a standard definition and association to other People aspects: Aptitudes,
Experiences, Trainings and Competency level. Competency level is not included in the framework
descriptions. SCOR recognizes 5 commonly accepted competency levels:
 Novice: Untrained beginner, no experience, requires and follows detailed documentation

 Beginner: Performs the work, with limited situational perception.
 Competent: Understands the work and can determine priorities to reach goals.
 Proficient: Oversees all aspects of the work and can prioritize based on situational aspects.
 Expert: Intuitive understanding. Experts can apply experience patterns to new situations.
These competency levels are used similarly as process or practice maturity levels. The person or job
specification is evaluated on the found (person) or desired (job specification) level of competency.
Codification within the People section consists of coding of the Skills as well as the Aptitudes,
Experiences and Trainings that define the Skills. All People elements start with a capital letter H
followed by a capital letter representing the element: S for Skills, A for Aptitudes, E for Experiences
and T for Trainings. These are followed by a period and a for digit number. For example HS.0010 is
the code for Basic Finance skill, HT.0039 is the code for CTPAT training.
Note: The number in the ID – for example the 0018 in HA.0018 – does NOT indicate any kind of
priority, importance, or other meaning. It is a unique identifier.
Supply Chain Modeling
Since the inception of the SCOR model companies have looked at how to best utilize the rich content
of SCOR. Supply Chain Council has supported and continuous to support practitioners by offering
training focused on the interpretation and use of SCOR. Experience tells us that SCOR as a tool needs
to be integrated into existing project methodologies used, where they exist. Effective supply chain
organizations have learned that using SCOR is not a business goal; it is a tool to reach the true
business goal: An integrated optimized supply chain, meeting market requirements.
A typical SCOR project comprises of the following phases:
Understand the scope:
The scope of a SCOR project is defined by the following components: a. Business: Understanding the
markets the supply chain serves, the products and/or services the supply chain delivers and
competitive landscape for each product and market;
 Configuration: Understanding the high level processes. Develop geographic maps and thread
diagrams to understand material flows and supporting processes

 Performance: Understanding the areas of underperformance. Companies develop scorecards and may
organize a benchmark to understand how their supply chains perform in comparison to similar supply
chains
 Opportunity: Defining the improvement opportunity. Setting the scope of the effort. Focus on one or
few supply chains and one or few metrics per supply chain
 Plan the next steps.
Investigate causes:
Determine where the root causes are: a. Metrics decomposition: For each problem metric identify the
diagnostic metrics and collect the data to calculate these diagnostic metrics. Determine the problem
metric or metrics. Repeat this process until no more diagnostic metrics can be identified;
 Process problem discovery: For all diagnostic metrics, determine the associated processes. For each
process collect information about how the process operates. („operates‟ not „is supposed to operate‟).
Collect relevant information about who performs the work, sources or lack of relevant information to
perform the work, rules and regulations that apply, tools and software supporting the process. Collect
observed performance information from those who perform the work.
 Classify the problems: Group relevant observed process and performance problems together and
determine how this impacts the overall problem. (Cause and Effect)
Identify solutions:
Review different ways to solve the individual observed problems and the overall problem.
 Research better practices: Determine how others have solved similar problems. Identify best practices,
leading practices and software and tools that may address individual problems and/or the overall
problem;
 Develop what-if scenarios: Using information about alternative practices, new technology, internal
knowledge and external resources* describe new ways to configure and organize the processes. (*)
External resources can be paid consultancies, peers in other industries or peers in other business units in
the same company. Internal resources and knowledge refers to workers in or close to the process. Some
IT resources may qualify as internal resources;
 Review and select: Review each scenario. Weigh improvement impact against estimated cost, risk,
effort, lead-time, and feasibility. Select the appropriate (or best) solution scenario for each problem. The
collection of these solutions is the strategy to resolve the overall problem.

Design solutions:
Document the new processes, technologies and organizations. Describe the To-Be state.
 Document processes: Develop the detailed transactional information.

 Develop detailed process flows and descriptions. Document how the process is organized, who does
what and what information is used and created in each process step.
 Develop detailed work instructions. Document how the work is done. Develop Standard Operating
Procedures (SOPs) for new processes. Update SOPs for all processes impacted by the change.
 Document organizational designs:
o Develop detailed job descriptions
o Document authority, responsibility and span of control;
o Document training needs, develop training if needed;
o Document metrics, describe how the processes (and process owners) will be measured upon
implementation of the new process.
 Document technology requirements: Describe how existing and/or new technology will support the new
process. A business requirements document will enable internal and/or external technology providers to
match their tools to the process needs. Solution design may require significant resources and time for
projects with large dependencies on technology and maybe considered separate IT projects.
 Document transitions: Describe the dependencies and restrictions related to the change. Estimate
resource needs
Plan and launch change projects:
Create a roadmap to implement the changes.
 Define projects: Define unique projects for implementation. Combine changes that impact the same
technology, organizations, products, processes as required. Note: Not all projects are equal: Large scope
changes need managed projects, small changes may need a memo to a manager with documentation.
 Critical path and dependencies: Document the interdependencies of projects. “Project D requires
Project K to be completed”. “Project F can start at any time”.
 Manage the project portfolio. Prioritize projects based on expected return, business strategy and
other relevant projects. Allocate resources; people, funds, time.
 Launch and oversee the projects. Make sure the project deliverables result in the desired change.
Supply Chain Council recognizes that not every SCOR project is the same. Some projects require all
or most detailed activities listed to take place to ensure the project outcomes. Most projects however
do not. For example: Supply chains that have previously identified realistic improvement targets do
not necessarily require another round of benchmarking. Or, if the changes do not require changes to
software, do not spend months on documenting the technology requirements.
Work smart not hard.

Supply Chain Management Glossary

In the supply chain management Glossary, you will find the definition and explanation of
important terminologies that are widely used in and are associated with the supply chain
management.
A
Activity-Based Cost Accounting (ABC)
A cost accounting system that accumulates costs based on activities performed and then uses cost
drivers to allocate these costs to products or other bases, such as customers, markets, or projects. It
is an attempt to allocate overhead costs on a more realistic basis than direct labor or machine hours
Activity-Based Management (ABM)
The use of activity-based costing information about cost pools and drivers, activity analysis, and
business processes to identify business strategies; improve product design, manufacturing, and
distribution; and remove waste from operations.

Agreements
An agreement should clearly state what you are buying and its cost. Delivery terms and
responsibility, Installation related issues, if applicable, an acceptance provision detailing how and
when the buyer will accept the products, warranty issues, and your remedial actions should be clearly
spelled out in the agreement. Arbitration and conflict resolution mechanisms should also be included
in the contract because even the best written agreements are subject to misinterpretation. A well-
developed agreement can provide adequate protection against economic opportunism between
parties and lead to a positive relationship. Effective long-term agreements generally have specific,
measurable objectives stated in them, including pricing mechanisms, delivery and quality standards
and improvements, cost savings sharing, evergreen clauses, and termination of the relationship.
B
Business-to-Business Commerce (B2B)
Business being conducted over the Internet between businesses. The implication is that this
connectivity will cause businesses to transform themselves via supply chain management to become
virtual organizations, reducing costs, improving quality, reducing delivery lead time, and improving
due-date performance.
C
Capacity Management
The function of establishing, measuring, monitoring, and adjusting limits or levels of capacity in
order to execute all manufacturing schedules; i.e., the production plan, master production schedule,
material requirements plan, and dispatch list. Capacity management is executed at four levels:
resource requirements planning, rough-cut capacity planning, capacity requirements planning, and
input/output control.
Capacity Planning
The process of determining the amount of capacity required to produce in the future. This process
may be performed at an aggregate or product-line level (resource requirements planning), at the
master-scheduling level (rough-cut capacity planning), and at the material requirements planning

level (capacity requirements planning).
Capacity Requirements Planning
The function of establishing, measuring, and adjusting limits or evels of capacity. The term capacity
requirements planning in this context refers to the process of determining in detail the amount of
labor and machine resources required to accomplish the tasks of production. Open shop orders and
planned orders in the MRP system are input to CRP, which through the use of parts routings and
time standards translates these orders into hours of work by work center by time period. Even
though rough-cut capacity planning may indicate that sufficient capacity exists to execute
the MPS, CRP may show that capacity is insufficient during specific time periods.
Capacity Strategy
One of the strategic choices that a firm must make as part of its manufacturing strategy. There are
three commonly recognized capacity strategies: lead, lag, and tracking. A lead capacity strategy adds
capacity in anticipation of increasing demand. A lag strategy does not add capacity until the firm is
operating at or beyond full capacity. A tracking strategy adds capacity in small amounts to attempt
to respond to changing demand in the marketplace.
Capacity Utilization
A measure (usually expressed as a percentage) of how intensively a resource is being used to

produce a good or service. Utilization compares actual time used to available time. Traditionally,
utilization is the ratio of direct time charged (run time plus setup time) to the clock time available.
Utilization is a percentage between 0% and 100% that is equal to 100% minus the percentage of
time lost due to machine, tool, worker, etc., unavailability.
Capacity – Information Flows
Capacity is the capability of a worker, machine, work center, plant, or organization to produce output
per time period. Information aids us in addressing capacity availability, unused capacity and
performance issues that impact a business‘s revenue and productivity as well as its image and
reputation

Capacity – Physical Flows
1) The capability of a system to perform its expected function. 2) The capability of a worker, machine,
work center, plant, or organization to produce output per time period. Capacity required represents
the system capability needed to make a given product mix (assuming technology, product
specification, etc.). As a planning function, both capacity available and capacity required can be
measured in the short term (capacity requirements plan), intermediate term (rough-cut capacity
plan), and long term (resource requirements plan).
Channel management
The management of firms or individuals that participate in the flow of goods and services from the
raw material supplier and producer to the final user or customer.
Collaboration
Collaboration is defined as the process by which partners adopt a high level of purposeful
cooperation to maintain a trading relationship over time. The relationship is bilateral; both parties
have the power to shape its nature and future direction over time. Mutual commitment to the future
and a balanced power relationship are essential to the process. While collaborative relationships are
not devoid of conflict, they include mechanisms for managing conflict built into the relationship.
Commodity Strategy Development
The purchasing plan for a family of items. This would include the plan to manage the supplier base
and solve problems.
Continuous Improvement
A never-ending effort to expose and eliminate root causes of problems; small step improvement as
opposed to big step improvement.
Contract
An agreement between two or more competent persons or companies to perform or not to perform
specific acts or services or to deliver merchandise. A contract may be oral or written. A purchase
agreement when accepted by a supplier, becomes a contract. Acceptance may be in writing or by

performance, unless the purchase order requires acceptance in writing.
Contract Management
Contract management is a strategic management discipline employed by both buyers and sellers
whose objectives are to manage customer and supplier expectations and relationships, control risk
and cost, and contribute to organizational profitability/success. For successful service contract
administration, the buyer needs to have a realistic degree of control over the supplier‘s performance.
Crucial to success in this area is the timely availability of accurate data including the contractor‘s plan
of performance and the contractor‘s actual progress.
Cost
See: Activity-based Cost Accounting, Activity-based Management, Cost System Design, Target
Costing, Total Costs, Total Cost of Ownership
Cost Management
In terms of activity-based cost accounting, cost management involves control of activities to

eliminate waste, improve cost drivers, and plan operations. This process should influence the
organization‘s strategy setting process. Factors such as product pricing, introduction of new
products, and distribution of existing products are examples of strategic decisions that are affected
by cost management.
Cost System Design
An intelligent cost system design is one that is simple while still providing managers with information
they need to make decisions. As most manufacturing processes were labor intensive at the turn of
the century, a majority of cost management systems relied on direct labor to assign indirect costs to
products and services. Indirect or overhead costs are costs that are associated with or caused by two
or more operating activities jointly but are not traceable to each of them individually. Direct costs, on
the other hand, are specifically traceable to or caused by a specific project or production operation.
Currency Conversions
Issues with currency conversion add complexity to the global sourcing process. The absence of fixed
exchange rates can be a problem. Fluctuations in exchange rates can have a significant impact on the

costs and profits made by the buyer and the seller. U.S. purchasing departments are particularly at a
disadvantage. Their unfamiliarity in dealing with foreign currencies leads to higher costs in two ways:
1) the buyers attempt to put all currency risk on the supplier which causes the supplier to include
charges for hedging; 2) In an attempt to avoid dealing with foreign currency, buyers‘ use U.S.
subsidiaries who accept U.S. dollars but charge higher markups. The unfamiliarity of vendors and
suppliers with currency conversion issues can cause supply chain slowdowns and force businesses to
revert to using paper invoices, bound ledgers and filing cabinets leading to delays and increased
costs in the supply chain.
Customer Relationship Management (CRM)
A marketing philosophy based on putting the customer first. It involves the collection and analysis of
information designed for sales and marketing decision support to understand and support existing
and potential customer needs. It includes account management, catalog and order entry, payment
processing, credits and adjustments, and other functions.
Customer Value
The customer value approach focuses on how people choose among competing suppliers, customer
attraction and retention, and market-share gains.
Customer/Order Fulfillment Process
A series of customers‘ interactions with an organization through the order filling process, including
product/service design, production and delivery, and order status reporting.
D
Demand Management
The function of recognizing all demands for goods and services to support the market place. It
involves prioritizing demand when supply is lacking. Proper demand management facilitates the
planning and use of resources for profitable business results.

Distribution Channel
The distribution route, from raw materials through consumption, along which products travel.
Distribution Channel Design
The planned channels of inventory disbursement from one or more sources to field warehouses and
ultimately to the customer. There are several levels in the distribution network structure.
F
Facility Location
Location decisions are a basic determinant of profitability in international logistics. Decisions on

where to manufacture, to assemble, to store, to transship and to consolidate can make the difference
between profit and loss. Because of international differences in basic factor costs and because of
exchange rate movements, location decisions are very important. Also, these decisions involve
substantial involvement in fixed assets in the form of facilities and equipment. Location decisions,
therefore, can have a continuing impact over time on the company‘s financial and competitive
position. As movement towards global manufacturing increases, organizations should consider
location decisions through total cost analysis which includes activity related costs such as
manufacturing, transportation and handling as well as inventory holding costs, tariffs, and taxes.
Forecast Error
The difference between actual demand and forecast demand, stated as an absolute value or as a
percentage. E.g., average forecast error, forecast accuracy, mean absolute deviation, tracking signal.
There are three ways to accommodate forecasting errors: One is to try to reduce the error through
better forecasting. The second is to build more visibility and flexibility into the supply chain. And the
third is to reduce the lead time over which forecasts are required.
Forecast Sharing
A supply partnership between a buyer and supplier is based on mutual interdependency and respect

and calls for information sharing between the involved parties. By sharing its demand forecast with
the supplier, the buyer benefits in two ways:
1) the partner becomes familiar with the buyer‘s needs, and

2) the buyer develops a dependable supply source. Forecast sharing allows the supplier to plan for
and schedule production efficiently.
Forecasting
The business function that attempts to predict sales and use of products so they can be purchased or
manufactured in appropriate quantities in advance.
Forecasting Methods
An approach to forecasting that is based on intuitive or judgmental evaluation. It is used generally

when data are scarce, not available, or no longer relevant. Common types of qualitative techniques
include: personal insight, sales force estimates, panel consensus, market research, visionary
forecasting, and the Delphi method. Examples include developing long-range projections and new
product introduction.
G
Globalization
See: Currency Conversion, Language
I
Inbound Logistics
Following the receipt of materials, parts or resale products from external suppliers, the subsequent
storage, handling, and transportation requirements to facilitate either manufacturing or market
distribution constitute inbound logistics.

Industry Standards
An industrial standard is a uniform identification that is agreed on. Industrial standardization can be
defined as the process of establishing agreement on uniform identifications for definite
characteristics of quality, design, performance, quantity, service, etc.
Information Sharing
A strategic partnering relationship between suppliers and buyers is characterized by a willingness to

be open, and to share forecasted demand and cost data as well as the benefits resulting from the
information sharing. Both parties in the relationship generally follow a continuous improvement
philosophy towards total cost of material acquisition and ownership along with quality and service.
Cost, quality and schedule information that is confidential is shared both ways between firms during
the early and ongoing stages of design and during the production life-cycle of the supplying
relationship. This openness exists because of the high degree of trust earned through multiple
successful interactions between the two organizations.
Information Technology
The technology of computers, telecommunications, and other devices that integrate data,
equipment, personnel, and problem-solving methods in planning and controlling business activities.
Information technology provides the means for collecting, storing, encoding, processing, analyzing,
transmitting, receiving, and printing text, audio, or video information.
Insource vs Outsource
The act of deciding whether to produce an item internally or buy it from an outside supplier. Factors
to consider in the decision include costs, capacity availability, proprietary and/or specialized
knowledge, quality considerations, skill requirements, volume, and timing.
Interplant Transfer
The shipment of a part or product by one plant to another plant or division within the corporation.

Inventory
1) Those stocks or items used to support production (raw materials and work-in-process items),
supporting activities (maintenance, repair, and operating supplies), and customer service (finished
goods and spare parts). Demand for inventory may be dependent or independent. Inventory
functions are anticipation, hedge, cycle (lot size), fluctuation (safety, buffer, or reserve), transportation
(pipeline), and service parts.
2) In the theory of constraints, inventory is defined as those items purchased for resale and includes
finished goods, work in process, and raw materials. Inventory is always valued at purchase price and
includes no value-added costs, as opposed to the traditional cost accounting practice of adding
direct labor and allocating overhead as work in process progresses through the production process.
Inventory Management Systems
Software applications that permit monitoring events across a supply chain. These systems track and
trace inventory globally on a line-item level and notify the user of significant deviations from plans.
Companies are provided with realistic estimates of when material will arrive.With Inventory visibility,
organizations are able to make decisions that optimize supply chain performance. Information is
available to reduce costs by removing inventory from the supply chain, reducing obsolescence,
decreasing operational assets, lowering network operations cost, and decreasing transportation
costs. Visibility also increases competitiveness by improving customer satisfaction and market
responsiveness.
Inventory Positioning
Inventory positioning refers to the selective location of various items in the product line in plant,
regional, or field warehouses. Inventory positioning has a bearing on facility location decision, and
therefore, must be considered in the logistics strategy.
J
Joint Venture
An agreement between two or more firms to risk equity capital to attempt a specific business

objective.
L
Language
Differences in culture, language, dialects or terminology may result in miscommunication and cause
problems. While both parties may think that they understand what the other party has said, a true
agreement may be missing. A simple word like ―plant,‖ for instance, can be a source of confusion – in
the Far East, the word ―plant‖ is interpreted to mean only a living organism, not a physical facility.
Lead Times/Cycle Times
1) A span of time required to perform a process (or series of operations). 2) In a logistics context, the
time between recognition of the need for an order and the receipt of goods. Individual components
of lead time can include order preparation time, queue time, processing time, move or transportation
time, and receiving and inspection time.
Lean Manufacturing
A philosophy of production that emphasizes the minimization of the amount of all the resources
(including time) used in the various activities of the enterprise. It involves identifying and eliminating
non-value-adding activities in design, production, supply chain management, and dealing with the
customers. Lean producers employ teams of multiskilled workers at all levels of the organization and
use highly flexible, increasingly automated machines to produce volumes of products in potentially
enormous variety. It contains a set of principles and practices to reduce cost through the relentless
removal of waste and through the simplification of all manufacturing and support processes.
Legal Issues
Purchasing law has been primarily developed from laws regarding contracts. In order for a contract
to be valid, four conditions must be present: 1) Parties with full contractual capacity should willfully
and in the absence of fraudulent activity have signed the contract; 2) the underlying purpose for the
agreement must be legal; 3) all conditions regarding the offer and acceptance of the contract must
be met; 4) the contract should have an element of mutual obligation; that is both parties must agree

to do something they otherwise would not be required to do.
Another topical area of commercial law that is relevant to purchasing professionals has to do with
laws regarding agency. The laws regarding agency outline the types of authority that an agent
possesses in performing duties for the principal. An agent is a person, who, by express or implied
agreement is authorized to act for someone else in business dealings with a third party. This is
precisely what purchasing managers and buyers do. By law, a buyer operates under two types of
authority – actual authority and apparent authority. Apparent authority is that level of authority
perceived by outside parties to be available to the purchasing manager. The concepts of actual and
apparent authority are important in terms of a buyer‘s legal liability. If a purchasing manager, in
carrying out normal procurement activities, exceeds his or her actual authority but not apparent
authority, then the employer is still responsible for performance of the contract but could seek legal
action against the purchasing manager personally. If, on the other hand, the agent exceeds both his
or her actual and apparent authority, a seller cannot usually hold the buying firm liable but may be
able to hold the agent personally liable for his actions.
Logistics Information Systems
Converting data to information, portraying it in a manner useful for decision making, and interfacing
the information with decision-assisting methods are considered to be at the heart of an information
system. Logistics information systems are a subset of the firm‘s total information system, and it is
directed to the particular problems of logistics decision making.
Logistics Management
Logistics management is the process of strategically managing the procurement, movement and
storage of materials, parts and finished inventory (and the related information flows) through the
organization and its marketing channels in such as way that current and future profitability are
maximized through the cost-effective fulfillment of orders.
M
Maintenance
See: Preventative Maintenance, Total Product Maintenance

Manufacturing
See: Lean Manufacturing, Manufacturing Layout Strategy, Reverse Logistics, Order Management,
Scheduling
Manufacturing Layout Strategy
An element of manufacturing strategy. It is the analysis of physical capacity, geography, functional

needs, corporate philosophy, and product-market/process focus to systematically respond to
required facility changes driven by organizational, strategic, and environmental considerations.
Market Analysis
See: Business-to-Business, Channel Management, Customer Relationship Management (CRM),

Customer Value, Promotions
N
New Product Development
See: Lead Times/Cycle Times, Supplier Integration in New Product Development
Negotiation
Negotiation is a process of formal communication where two or more people come together to seek
mutual agreement over an issue or issues. Negotiation is particularly appropriate when issues
besides price are important for the buyer or when competitive bidding will not satisfy the buyer‘s
requirements on those issues.
O
Operating Policies and Procedures
Definitive statements of what should be done in the business, and a formal organization and

indexing of a firm‘s procedures. They are usually outlined in manuals which are printed and
distributed to the appropriate functional areas.
Order management
Order management involves the seamless integration of orders from multiple channels with
inventory databases, data collection, order processing including credit card verification, fulfillment
systems and returns across the entire fulfillment network. For proper execution the process involves
real-time visibility into the entire order lifecycle starting from the placement of order and ensuring
that orders (SKUs) are not lost, delayed, or corrupted during the fulfillment process. The system may
also comply with and support parcel carriers and provide sophisticated, centralized freight
management and tracking/tracing capabilities. Clients, Customer service representatives account
managers and suppliers will thus have the ability to track real-time inventory levels for each SKU and
inquire about order and shipment status via the web – anytime, anywhere.
Outbound Logistics
The process related to the storage and movement of the final product and related information flows
from the end of the production line to the end user.
P
Packaging
Packaging has a significant impact on the cost and productivity of logistics. Inventory control
depends upon the accuracy of manual or automatic identification systems keyed by product
packaging. Order selection speed, accuracy and efficiency are influenced by package identification,
configuration, and handling ease. Handling efficiency is affected by package design, unitization
capability and techniques, and communication or information transfer between channel partners.
Transportation and storage costs are driven by package size and density. Customer service depends
upon packaging to allow quality control during distribution to provide, customer education and
convenience, and to comply with environmental regulations. Given the increasing length and
complexity of global supply chains and the costs of locating new facilities, the concept of packaging
postponement to achieve strategic flexibility is particularly important.

Performance Measurement
Supplier performance measurement and evaluation includes the methods and techniques used to
collect information that can be used to measure, rate or rank supplier performance on a continuous
basis. The measurement system is a crucial part of supplier management and development.
Preventative Maintenance
The activities, including adjustments, replacements, and basic cleanliness, that forestall machine
breakdowns. The purpose is to ensure that production quality is maintained and that delivery
schedules are met. In addition, a machine that is well cared for will last longer and cause fewer
problems.
Program Management
The coordinated management of a portfolio of projects to achieve a set of business objectives is

called program management. Or, a program might refer to an ongoing set of activities internal to the
organization, for example, a Total Quality Management program, workplace safety program, supplier
development program, etc.
Project Management
Project management is the application of knowledge, skills, tools and techniques to a broad range of
activities in order to meet the requirements of the particular project. A project is a temporary
endeavor undertaken to achieve a particular aim. Project management knowledge and practices are
best described in terms of their component processes. These processes can be placed into five
Process Groups: Initiating, Planning, Executing, Controlling and Closing. – and nine Knowledge Areas
– Project Integration Management, Project Scope Management, Project Time Management, Project
Cost Management, Project Quality Management, Project Human Resource Management, Project
Communications Management, Project Risk Management, and Project Procurement Management.
Promotions
One of the four P‘s (product, price, place, and promotion) that constitute the set of tools used to
direct the business offering to the customer. Promotion is the mechanism whereby information
about the product offering is communicated to the customer and includes public relations,
advertising, sales promotions, and other tools to persuade customers to purchase the product

offering.
Purchase Requirements
See: Specifications, Industry Standards, Statement of Work, Service Level Agreement
Q
Quality
Conformance to requirements or fitness for use. Quality can be defined through five principal
approaches: (1) Transcendent quality is an ideal, a condition of excellence. (2) Product-based quality
is based on a product attribute. (3) User-based quality is fitness for use. (4) Manufacturing-based
quality is conformance to requirements. (5) Value-based quality is the degree of excellence at an
acceptable price. Also, quality has two major components: (1) quality of conformance—quality is
defined by the absence of defects, and (2) quality of design—quality is measured by the degree of
customer satisfaction with a product‘s characteristics and features.
Quality Programs
Some of quality programs that are currently used include:

Total Quality Management (TQM): TQM is a management approach to long-term success through
customer satisfaction. TQM is based on the participation of all members of an organization in
improving processes, goods, services, and the culture in which they work. Total Quality Engineering
(TQE):TQE is the discipline of designing quality into the product and manufacturing processes by
understanding the needs of the customer and performance capabilities of the equipment.
Total Quality Control (TQC): TQC is the process of creating and producing the total composite good
and service characteristics by marketing, engineering, manufacturing, purchasing, etc., through which
the good and service will meet the expectations of customers.
Statistical Quality Control (SQC): SQC is the application of statistical techniques to control quality.
Six-Sigma Quality: Six sigma quality is a term used generally to indicate that a process is well
controlled, i.e., tolerance limits are ±6 sigma from the centerline in a control chart.

Relationship Management
See: Agreements, Collaboration, Contract, Joint Venture, Strategic Alliance, Supplier-Customer

Partnership
Reverse Logistics
A supply chain that is dedicated to the reverse flow of products and materials for returns, repair,
remanufacture, and/or recycling.
S
Scheduling
Scheduling involves taking decisions regarding the allocation of available capacity or resources
(equipment, labor and space) to jobs, activities, tasks or customers over time. Scheduling thus results
in a time-phased plan, or schedule of activities. The schedule indicates what is to be done, when, by
whom and with what equipment. Scheduling seeks to achieve several conflicting objectives: high
efficiency, low inventories and good customer service. Scheduling can be classified by the type of
process: line, batch and project.
Service Level Agreement
Service-level agreements (SLAs) are contracts between service providers and customers that define
the services provided, the metrics associated with these services, acceptable and unacceptable
service levels, liabilities on the part of the service provider and the customer, and actions to be taken
in specific circumstances.
Six Sigma
See: Quality Programs
Sourcing Strategy
A successful sourcing strategy requires a thorough understanding of a company‘s business strategy,

the resources required to deliver that strategy, the market forces and the unique risks within the
company associated with implementing specific approaches. A periodic review of the sourcing
strategy ensures achievement of desired results and continued alignment with business objectives.
Some of the sourcing strategies that are used in supply chain management today include:
Single sourcing: A method whereby a purchased part is supplied by only one supplier.
A JIT manufacturer will frequently have only one supplier for a purchased part so that close
relationships can be established with a smaller number of suppliers. These close relationships (and
mutual interdependence) foster high quality, reliability, short lead times, and cooperative action.
Multisourcing: Procurement of a good or service from more than one independent supplier.
Companies may use it sometimes to induce healthy competition between the suppliers in order to
achieve higher quality and lower price.
Outsourcing: The process of having suppliers provide goods and services that were previously
provided internally. Outsourcing involves substitution—the replacement of internal capacity and
production by that of the supplier.
Insourcing: The goods or services are developed internally.
Specifications
Specifications are the most detailed method of describing requirements. Various types of design
specifications are the detailed descriptions of the materials, parts, and components to be used in
making a product. Hence, they are the descriptions that tell the seller exactly what the buyer wants
to purchase.
Standard/Compatibility
1) An established norm against which measurements are compared. (APICS 10th ed.)
2) The Internet has transformed supply chain management into something closer to an exact science.
However for information to be shared, systems, both hardware and software, must be able to
communicate and be compatible so that all supply chain activities can be optimized across company
boundaries. Standards promote interoperability and compatibility among operating environments.

Statement of Work (S.O.W)
The most critical ingredient of a successful procurement of services is the development and
documentation of the requirements – the statement of work. The S.O.W. identifies what the
contractor is to accomplish. It first clearly identifies the primary objective and then the subordinate
objectives. One of the goals of the S.O.W. is to gain understanding and agreement with a contractor
about the specific nature of the technical activity to be performed. The S.O.W. also impacts the
administration of the contract by defining the scope of the contract, that is, what the contractor is
supposed to do and the purchaser supposed to receive.
Statistic Quality Control
See: Quality Programs
Strategic Alliance
A relationship formed by two or more organizations that share (proprietary), participate in joint
investments, and develop linked and common processes to increase the performance of both
companies. Many organizations form strategic alliances to increase the performance of their
common supply chain.
Supplier Development Training
Education and training is the most common approach to supplier development and improvement. A
purchaser may provide training in statistical process control, quality improvement techniques, just-
in-time delivery or any other crucial performance area. In order for purchasing to adequately assess
and aid suppliers in improving quality, purchasers need to become familiar with the important
components of quality management. In many organizations, purchasing may request the assistance
of quality and engineering departments in assisting with the supplier quality training. Purchasing
companies emphasize four areas of quality training with their suppliers: 1) Total quality management
and quality improvement training, 2) statistical quality control techniques training, 3) training
focusing on integrating quality into the design of products and processes to reduce variability, and 4)
training in problem solving techniques.
Supplier Integration in New Product Development
Supplier integration into new product/process/service development suggests that suppliers are
providing information and directly participating in decision making for purchases used in the new

product/process/service. This integration can occur during idea generation, preliminary

business/technical assessment, product/process/service concept development,
product/process/service design and development and prototype build, test or production ramp up.
Supplier Intelligence
Supplier Intelligence is the purposeful, coordinated and ethical monitoring of strategic suppliers,
within a specific marketplace.
Supplier Performance Evaluation
The main objective of the supplier evaluation process is to reduce purchase risk and maximize the
overall value of the purchaser. It typically involves evaluating, at a minimum, supplier quality, cost
competitiveness, potential delivery performance and technological capability. Some of the other
criteria used in the preliminary evaluation of suppliers include financial risk analysis, evaluation of
previous performance, and evaluation of supplier provided information.
Supplier-Customer Partnership
A long-term relationship between a buyer and a supplier characterized by teamwork and mutual
confidence. The supplier is considered an extension of the buyer‘s organization. The partnership is
based on several commitments. The buyer provides long-term contracts and uses fewer suppliers.
The supplier implements quality assurance processes so that incoming inspection can be minimized.
The supplier also helps the buyer reduce costs and improve product and process designs.
Supply Chain Design
Supply chain design involves the determination of how to structure a supply chain. Design decisions
include the selection of partners, the location and capacity of warehouse and production facilities,
the products, the modes of transportation, and supporting information systems.
Supply Chain Inventory Visibility
Software applications that permit monitoring events across a supply chain. These systems track and
trace inventory globally on a line-item level and notify the user of significant deviations from plans.
Companies are provided with realistic estimates of when material will arrive.

T
Target Costing
It is the process of designing a product to meet a specific cost objective. Target costing involves
setting the planned selling price, subtracting the desired profit as well as marketing and distribution
costs, thus leaving the required manufacturing or target cost.
Total Cost of Ownership (TCO)
In supply chain management, the total cost of ownership of the supply delivery system is the sum of
all the costs associated with every activity of the supply stream. The main insight that TCO offers to
the supply chain manager is the understanding that the acquisition cost is often a very small portion
of the total cost of ownership.
Total Costs
The sum of the variable, fixed and semivariable costs (costs that cannot be classified as variable or
fixed ) comprises total costs. As the volume of production increases, total costs increase. However,
the cost to produce each unit of product decreases. This is because the fixed costs do not increase,
they are simply spread over a larger number of units of products.
Total Productive Maintenance (TPM)
Preventive maintenance plus continuing efforts to adapt, modify, and refine equipment to increase
flexibility, reduce material handling, and promote continuous flows. It is operator-oriented
maintenance with the involvement of all qualified employees in all maintenance activities.
Training
Managers must ensure that appropriate personnel receive periodic training with respect to the
organization‘s ethical and professional standards. Supply managers should ensure that their
personnel receive training on current thinking and techniques in the areas of requirements planning,
source selection, pricing, cost analysis, negotiation and supply management as well as ethical and
professional standards.
Some examples of types of training in organizations:

Cross-Training: The providing of training or experience in several different areas, e.g., training an
employee on several machines rather than one. Cross-training provides backup workers in case the
primary operator is unavailable.
On-the-Job Training (OJT): Learning the skills and necessary related knowledge useful for the job at
the place of work or possibly while at work.
W
Warehouse Management Layouts
This refers to the configuration of the warehouse site with lines, storage areas, aisles, etc. Layout or
storage plan of a warehouse should be planned to facilitate product flow. Special attention should be
given to location, number, and design of receiving and loading docks.

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Supply Chain Management

Compiled by Aslam Soni, CSCP, PMP Page 1

What is Supply Chain Management?

What is Supply Chain Management? Its Basics and Introduction:

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Introduction to Supply Chain Management Structures

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 With a significant history of stability between demand and supply.

What is Supply Chain Management? - Understanding Using an

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What is Supply Chain Management? - in Manufacturing:

What is Supply Chain Management ?- In Services

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Summing Up the Concept of Supply Chain Management

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What is Value Chain?

Value Chain Definition:

Supply Chain Management System:

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What is Value Chain Mapping:

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Supply Chain Strategy

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Other concepts covered in this section include

 Organizational and supply chain strategy

 Alignment of capabilities and strategy

 Resolving misalignment or gaps

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Strategic Supply Chain Management

 Focused low cost—designed to meet well-defined buyer needs at a low cost

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Focus Advantage Strategies

 Niche marketing (versus mass marketing)

Some examples of niche market approaches include

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Choosing Business Strategies

Organizational and Supply Chain Strategy, Prioritization,

Goals of Organizational Strategy

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Strategy: Customer Focus and Alignment

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Strategy: Forecast-Driven Enterprise

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 The retailer forecasts demand from parents who purchase diapers

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This is also known as a ―pull system,‖ and it entails the following:

The challenge in changing from forecast-driven (push) to demand-driven (pull) systems is in

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 High average utilization rate in manufacturing

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Supply Chain Strategies

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What is Logistics Management?

Compiled by Aslam Soni, CSCP, PMP Page 25