1.

Basic Concepts of Supply Chain Management

Supply chains encompass the companies and the business activities
needed to design, make, deliver, and use a product or service. Businesses
depend on their supply chains to provide them with what they need to survive
and thrive. Every business fits into one or more supply chains and has a role to
play in each of them. The pace of change and the uncertainty about how markets
will evolve has made it increasingly important for companies to be aware of the
supply chains they participate in and to understand the roles that they play.
Those companies that learn how to build and participate in strong supply chains
will have a substantial competitive advantage in their markets.
3
 FINANCIAL MANAGEMENT
COST ACCOUNTING
VISIT
HTTP://PAKISTANMBA.JIMDO.COM
Supply Chain Management
Nothing Entirely New. . . Just a Significant Evolution
The practice of supply chain management is guided by some basic
underlying concepts that have not changed much over the centuries. Several
hundred years ago, Napoleon made the remark, “An army marches on its
stomach.” Napoleon was a master strategist and a skillful general and this
remark shows that he clearly understood the importance of what we would now
call an efficient supply chain. Unless the soldiers are fed, the army cannot move.
Along these same lines, there is another saying that goes, “Amateurs talk
strategy and professionals talk logistics.” People can discuss all sorts of grand
strategies and dashing maneuvers but none of that will be possible without first
figuring out how to meet the day-to-day demands of providing an army with fuel,
spare parts, food, shelter, and ammunition. It is the seemingly mundane activities
of the quartermaster and the supply sergeants that often determine an army’s
success. This has many analogies in business.
The term “supply chain management” arose in the late 1980s and came into
widespread use in the 1990s. Prior to that time, businesses used terms such as
“logistics” and “operations management” instead. Some definitions of a supply
chain are offered below:
“A supply chain is the alignment of firms that bring products or services to
market.”—from Lambert, Stock, and Ellram in their book Fundamentals of
Logistics Management.
4
Supply Chain Management
“A supply chain consists of all stages involved, directly or indirectly, in fulfilling a
customer request. The supply chain not only includes the manufacturer and
suppliers, but also transporters, warehouses, retailers, and customers
themselves.”— from Chopra and Meindl in their book Supply Chain
Management: Strategy, Planning, and Operations.
“A supply chain is a network of facilities and distribution options that performs the
functions of procurement of materials, transformation of these materials into
intermediate and finished products, and the distribution of these finished products
to customers.”—from Ganeshan and Harrison at Penn State University in their
article ‘An Introduction to Supply Chain’.
If this is what a supply chain is then we can define supply chain
management as the things we do to influence the behavior of the supply chain
and get the results we want. Some definitions of supply chain management are:
“The systemic, strategic coordination of the traditional business functions and the
tactics across these business functions within a particular company and across
businesses within the supply chain, for the purposes of improving the long-term
performance of the individual companies and the supply chain as a whole.”—
from Mentzer, DeWitt, Deebler, Min, Nix, Smith, and Zacharia in their
articleDefining
Supply Chain Management in the Journal of Business Logistics.
“Supply chain management is the coordination of production, inventory, location,
and transportation among the participants in a supply chain to achieve the best
mix of responsiveness and efficiency for the market being served.”—from
Essentials of supply chain management. (John Wiley & Sons)
There is a difference between the concept of supply chain management
and the traditional concept of logistics. Logistics typically refers to activities that
occur within the boundaries of a single organization and supply chains refer to
networks of companies that work together and coordinate their actions to deliver
a product to market. Also traditional
5
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Supply Chain Management
Table of Contents
1. Basic Concepts of Supply Chain Management...........2 2.
How the Supply Chain Works.........................................6 3.
Aligning the Supply Chain with Business Strategy..19 4.
Supply Chain Operations: Planning and Sourcing...24 5.
Supply Chain Operations: Making and Delivering. .43 6.
Supply Chain Coordination and Use of Technology55 7.
Information Systems that Support the Supply Chain61 8.
Developing Supply Chain Systems..............................70 9. The
Promise of the Real-Time Supply Chain............82
Bibliography..........................................................................84
2
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Supply Chain Management
1. Basic Concepts of Supply Chain Management
Supply chains encompass the companies and the business activities
needed to design, make, deliver, and use a product or service. Businesses
depend on their supply chains to provide them with what they need to survive
and thrive. Every business fits into one or more supply chains and has a role to
play in each of them. The pace of change and the uncertainty about how markets
will evolve has made it increasingly important for companies to be aware of the
supply chains they participate in and to understand the roles that they play.
Those companies that learn how to build and participate in strong supply chains
will have a substantial competitive advantage in their markets.
3
 FINANCIAL MANAGEMENT
COST ACCOUNTING
VISIT
HTTP://PAKISTANMBA.JIMDO.COM
Supply Chain Management
Nothing Entirely New. . . Just a Significant Evolution
The practice of supply chain management is guided by some basic
underlying concepts that have not changed much over the centuries. Several
hundred years ago, Napoleon made the remark, “An army marches on its
stomach.” Napoleon was a master strategist and a skillful general and this
remark shows that he clearly understood the importance of what we would now
call an efficient supply chain. Unless the soldiers are fed, the army cannot move.
Along these same lines, there is another saying that goes, “Amateurs talk
strategy and professionals talk logistics.” People can discuss all sorts of grand
strategies and dashing maneuvers but none of that will be possible without first
figuring out how to meet the day-to-day demands of providing an army with fuel,
spare parts, food, shelter, and ammunition. It is the seemingly mundane activities
of the quartermaster and the supply sergeants that often determine an army’s
success. This has many analogies in business.
The term “supply chain management” arose in the late 1980s and came into
widespread use in the 1990s. Prior to that time, businesses used terms such as
“logistics” and “operations management” instead. Some definitions of a supply
chain are offered below:
“A supply chain is the alignment of firms that bring products or services to
market.”—from Lambert, Stock, and Ellram in their book Fundamentals of
Logistics Management.
4
Supply Chain Management
“A supply chain consists of all stages involved, directly or indirectly, in fulfilling a
customer request. The supply chain not only includes the manufacturer and
suppliers, but also transporters, warehouses, retailers, and customers
themselves.”— from Chopra and Meindl in their book Supply Chain
Management: Strategy, Planning, and Operations.
“A supply chain is a network of facilities and distribution options that performs the
functions of procurement of materials, transformation of these materials into
intermediate and finished products, and the distribution of these finished products
to customers.”—from Ganeshan and Harrison at Penn State University in their
article ‘An Introduction to Supply Chain’.
If this is what a supply chain is then we can define supply chain
management as the things we do to influence the behavior of the supply chain
and get the results we want. Some definitions of supply chain management are:
“The systemic, strategic coordination of the traditional business functions and the
tactics across these business functions within a particular company and across
businesses within the supply chain, for the purposes of improving the long-term
performance of the individual companies and the supply chain as a whole.”—
from Mentzer, DeWitt, Deebler, Min, Nix, Smith, and Zacharia in their
articleDefining
Supply Chain Management in the Journal of Business Logistics.
“Supply chain management is the coordination of production, inventory, location,
and transportation among the participants in a supply chain to achieve the best
mix of responsiveness and efficiency for the market being served.”—from
Essentials of supply chain management. (John Wiley & Sons)
There is a difference between the concept of supply chain management
and the traditional concept of logistics. Logistics typically refers to activities that
occur within the boundaries of a single organization and supply chains refer to
networks of companies that work together and coordinate their actions to deliver
a product to market. Also traditional
5
Supply Chain Management
logistics focuses its attention on activities such as procurement, distribution,
maintenance, and inventory management. Supply chain management
acknowledges all of traditional logistics and also includes activities such as
marketing, new product development, finance, and customer service.
In the wider view of supply chain thinking, these additional activities are
now seen as part of the work needed to fulfill customer requests. Supply chain
management views the supply chain and the organizations in it as a single entity.
It brings a systems approach to understanding and managing the different
activities needed to coordinate the flow of products and services to best serve
the ultimate customer. This systems approach provides the framework in which
to best respond to business requirements that otherwise would seem to be in
conflict with each other.
Taken individually, different supply chain requirements often have
conflicting needs. For instance, the requirement of maintaining high levels of
customer service calls for maintaining high levels of inventory, but then the
requirement to operate efficiently calls for reducing inventory levels. It is only
when these requirements are seen together as parts of a larger picture that ways
can be found to effectively balance their different demands. Effective supply
chain management requires simultaneous improvements in both customer
service levels and the internal operating efficiencies of the companies in the
supply chain. Customer service at its most basic level means consistently high
order fill rates, high on-time delivery rates, and a very low rate of products
returned by customers for whatever reason. Internal efficiency for organizations
in a supply chain means that these organizations get an attractive rate of return
on their investments in inventory and other assets and that they find ways to
lower their operating and sales expenses.
There is a basic pattern to the practice of supply chain management. Each
supply chain has its own unique set of market demands and operating
challenges and yet the issues remain essentially the same in every case.
Companies in any supply
6
Supply Chain Management
chain must make decisions individually and collectively regarding their
actions in five
areas:
1.Production—What products does the market want? How much of which
products
should be produced and by when? This activity includes the creation of master
production schedules that take into account plant capacities, workload balancing,
quality control, and equipment maintenance.
2.Inventory—What inventory should be stocked at each stage in a supply
chain?
How much inventory should be held as raw materials, semi-finished, or finished
goods? The primary purpose of inventory is to act as a buffer against uncertainty
in the supply chain. However, holding inventory can be expensive, so what are
the optimal inventory levels and reorder points?