Data Center College of the Philippines – Laoag City

Supply Chain Management in Hospitality Industry

Prepared by: Regina T. Ildefonso 1

 Data Center College of the Philippines – Laoag City
Supply Chain Management in Hospitality Industry

MODULE 1: INTRODUCTION TO SUPPLY CHAIN MANAGEMENT

What Is Supply Chain Management (SCM)?

All activities associated with the flow and transformation of goods from the raw materials
stage, through to end users, as well as the associated information inflows. This includes material and
information flows both up and down supply chain. Therefore supply chain includes a whole horde of
systems such as systems management, operations and assembly, purchasing, production schedule,
order processing, inventory management, transportation, warehousing, and customer service.

Supply chain management is the management of the flow of goods and services and includes
all processes that transform raw materials into final products. It involves the active streamlining of a
business's supply-side activities to maximize customer value and gain a competitive advantage in the
marketplace.

SCM represents an effort by suppliers to develop and implement supply chains that are as
efficient and economical as possible. Supply chains cover everything from production to product
development to the information systems needed to direct these undertakings.

Definitions of Supply Chain Management

The supply chain management (SCM) profession has continued to change and evolve to fit the
needs of the growing global supply chain. With the supply chain covering a broad range of disciplines,
the definition of what is a supply chain can be unclear. Often times SCM can be confused with the
term logistics management. CSCMP and the board of directors, comprised of industry experts, created
official definitions for the following terms.

CSCMP (Council of Supply Chain Management Professional)

Prepared by: Regina T. Ildefonso 2

 Data Center College of the Philippines – Laoag City
Supply Chain Management in Hospitality Industry

CSCMP’s Definition of Supply Chain Management

Supply chain management encompasses the planning and management of all activities
involved in sourcing and procurement, conversion, and all logistics management activities.
Importantly, it also includes coordination and collaboration with channel partners, which can be
suppliers, intermediaries, third party service providers, and customers. In essence, supply chain
management integrates supply and demand management within and across companies.

What is Supply Chain?

A supply chain consists of all parties involved, directly or indirectly, in fulfilling a customer
request. The supply chain includes not only the manufacturer and suppliers, but also transporters,
warehouses, retailers, and even customers themselves. Within each organization, such as a
manufacturer, the supply chain includes all functions involved in receiving and filling a customer

request. These functions include, but are not limited to, new product development, marketing,
operations, distribution, finance, and customer service
A supply chain is dynamic and involves the constant flow of information, product, and funds
between different stages. In our example, Wal-Mart provides the product, as well as pricing and

Prepared by: Regina T. Ildefonso 3

 Data Center College of the Philippines – Laoag City
Supply Chain Management in Hospitality Industry

availability information, to the customer. The customer transfers funds to Wal-Mart. Wal-Mart
conveys point-of-sales data as well as replenishment orders to the warehouse or distributor, who
transfers the replenishment order via trucks back to the store. Wal-Mart transfers funds to the
distributor after the replenishment. The distributor also provides pricing information and sends
delivery schedules to Wal-Mart. Wal-Mart may send back packaging material to be recycled. Similar
information, material, and fund flows take place across the entire supply chain. These examples
illustrate that the customer is an integral part of the supply chain. In fact, the primary purpose of any
supply chain is to satisfy customer needs and, in the process, generate profit for itself. The term supply
chain conjures up images of product or supply moving from suppliers to manufacturers to distributors
to retailers to customers along a chain. This is certainly part of the supply chain, but it is also important
to visualize information, funds, and product flows along both directions of this chain. The term supply
chain may also imply that only one player is involved at each stage. In reality, a manufacturer may
receive material from several suppliers and then supply several distributors. Thus, most supply chains
are actually networks. It may be more accurate to use the term supply network or supply web to
describe the structure of most supply chains.
A typical supply chain may involve a variety of stages, including the following:
• Customers
• Retailers
• Wholesalers/distributors
• Manufacturers
• Component/raw material suppliers
Each stage in a supply chain is connected through the flow of products, information, and
funds. These flows often occur in both directions and may be managed by one of the stages or an
intermediary

How Supply Chain Management Works

Typically, SCM attempts to centrally control or link the production, shipment, and distribution
of a product. By managing the supply chain, companies are able to cut excess costs and deliver

Prepared by: Regina T. Ildefonso 4

 Data Center College of the Philippines – Laoag City
Supply Chain Management in Hospitality Industry

products to the consumer faster. This is done by keeping tighter control of internal inventories,
internal production, distribution, sales, and the inventories of company vendors.
SCM is based on the idea that nearly every product that comes to market results from the efforts
of various organizations that make up a supply chain. Although supply chains have existed for ages,
most companies have only recently paid attention to them as a value-add to their operations.

In SCM, the supply chain manager coordinates the logistics of all aspects of the supply chain which
consists of five parts:

• The plan or strategy

• The source (of raw materials or services)
• Manufacturing (focused on productivity and efficiency)
• Delivery and logistics
• The return system (for defective or unwanted products)
The supply chain manager tries to minimize shortages and keep costs down. The job is not
only about logistics and purchasing inventory. According to Salary.com, supply chain managers, “make
recommendations to improve productivity, quality, and efficiency of operations.” Improvements in
productivity and efficiency go straight to the bottom line of a company and have a real and lasting
impact. Good supply chain management keeps companies out of the headlines and away from
expensive recalls and lawsuits.

Supply Chain Management – Boundaries and Relationships

Supply chain management is an integrating function with primary responsibility for linking
major business functions and business processes within and across companies into a cohesive and
high-performing business model. It includes all of the logistics management activities noted above, as
well as manufacturing operations, and it drives coordination of processes and activities with and
across marketing, sales, product design, finance, and information technology.

Prepared by: Regina T. Ildefonso 5

 Data Center College of the Philippines – Laoag City
Supply Chain Management in Hospitality Industry

CSCMP’s Definition of Logistics Management

(Council of Supply Chain Management Professionals) - backbone of SCM

Logistics management is that part of supply chain management that plans, implements, and
controls the efficient, effective forward and reverses flow and storage of goods, services and related
information between the point of origin and the point of consumption in order to meet customers'
requirements. (role is to organize the storage and distribution of goods)

Logistics Management – Boundaries and Relationships

Logistics management activities typically include inbound and outbound transportation

management, fleet management, warehousing, materials handling, order fulfilment, logistics network
design, inventory management, supply/demand planning, and management of third party logistics
services providers. To varying degrees, the logistics function also includes sourcing and procurement,
production planning and scheduling, packaging and assembly, and customer service. It is involved in
all levels of planning and execution--strategic, operational and tactical. Logistics management is an
integrating function, which coordinates and optimizes all logistics activities, as well as integrates
logistics activities with other functions including marketing, sales manufacturing, finance, and
information technology.

Supply Chains

A supply chain is the connected network of individuals, organizations, resources, activities,

and technologies involved in the manufacture and sale of a product or service. A supply chain starts
with the delivery of raw materials from a supplier to a manufacturer and ends with the delivery of the
finished product or service to the end consumer.

SCM oversees each touch point of a company's product or service, from initial creation to the
final sale. With so many places along the supply chain that can add value through efficiencies or lose
value through increased expenses, proper SCM can increase revenues, decrease costs, and impact a
company's bottom line.

Prepared by: Regina T. Ildefonso 6

 Data Center College of the Philippines – Laoag City
Supply Chain Management in Hospitality Industry

Objective of the Supply Chain

The objective of every supply chain should be to maximize the overall value generated. The
value (also known as supply chain surplus) a supply chain generates is the difference between what
the value of the final product is to the customer and the costs the supply chain incurs in filling the
customer’s request. Supply Chain Surplus = Customer Value – Supply Chain Cost The value of the final
product may vary for each customer and can be estimated by the maximum amount the customer is
willing to pay for it. The difference between the value of the product and its price remains with the
customer as consumer surplus. The rest of the supply chain surplus becomes supply chain profitability,
the difference between the revenue generated from the customer and the overall cost across the
supply chain.

DECISION PHASES IN A SUPPLY CHAIN

Successful supply chain management requires many decisions relating to the flow of information,
product, and funds. Each decision should be made to raise the supply chain surplus. These decisions
fall into three categories or phases, depending on the frequency of each decision and the time frame
during which a decision phase has an impact. As a result, each category of decisions must consider
uncertainty over the decision horizon.
1. Supply Chain Strategy or Design: During this phase, a company decides how to structure the supply
chain over the next several years. It decides what the chain’s configuration will be, how resources will
be allocated, and what processes each stage will perform. Strategic decisions made by companies
include whether to outsource or perform a supply chain function in-house, the location Key Point:
Supply chain design, planning, and operation decisions play a significant role in the success or failure
of a firm. To stay competitive, supply chains must adapt to changing technology and customer
expectations. 10 and capacities of production and warehousing facilities, the products to be
manufactured or stored at various locations, the modes of transportation to be made available along
different shipping legs, and the type of information system to be utilized.
2. Supply Chain Planning: For decisions made during this phase, the time frame considered is a quarter
to a year. Therefore, the supply chain’s configuration determined in the strategic phase is fixed. This

Prepared by: Regina T. Ildefonso 7

 Data Center College of the Philippines – Laoag City
Supply Chain Management in Hospitality Industry

configuration establishes constraints within which planning must be done. The goal of planning is to
maximize the supply chain surplus that can be generated over the planning horizon given the
constraints established during the strategic or design phase. Companies start the planning phase with
a forecast for the coming year (or a comparable time frame) of demand and other factors such as costs
and prices in different markets. Planning includes making decisions regarding which markets will be
supplied from which locations, the subcontracting of manufacturing, the inventory policies to be
followed, and the timing and size of marketing and price promotions.
3. Supply Chain Operation: The time horizon here is weekly or daily. During this phase, companies
make decisions regarding individual customer orders. At the operational level, supply chain
configuration is considered fixed, and planning policies are already defined. The goal of supply chain
operations is to handle incoming customer orders in the best possible manner. During this phase, firms
allocate inventory or production to individual orders, set a date that an order is to be filled, generate
pick lists at a warehouse, allocate an order to a particular shipping mode and shipment, set delivery
schedules of trucks, and place replenishment orders. Because operational decisions are being made
in the short term (minutes, hours, or days), there is less uncertainty about demand information. Given
the constraints established by the configuration and planning policies, 11 the goal during the
operation phase is to exploit the reduction of uncertainty and optimize performance.

PROCESS VIEWS OF A SUPPLY CHAIN

A supply chain is a sequence of processes and flows that take place within and between
different stages and combine to fill a customer need for a product. There are two ways to view the
processes performed in a supply chain.
1. Cycle View: The processes in a supply chain are divided into a series of cycles, each performed at
the interface between two successive stages of a supply chain.
2. Push/Pull View: The processes in a supply chain are divided into two categories depending on
whether they are executed in response to a customer order or in anticipation of customer orders.
Pull processes are initiated by a customer order, whereas push processes are initiated and
performed in anticipation of customer orders.

Prepared by: Regina T. Ildefonso 8

 Data Center College of the Philippines – Laoag City
Supply Chain Management in Hospitality Industry

CYCLE VIEW OF SUPPLY CHAIN PROCESSES

Given the five stages of a supply chain as, all supply chain processes can be broken down into
the following four process cycles, as shown in the figure below:

• Customer order cycle

• Replenishment cycle

• Manufacturing cycle

• Procurement cycle

Each cycle occurs at the interface between two successive stages of the supply chain. Not
every supply chain will have all four cycles clearly separated. For example, a grocery supply chain in
which a retailer stocks finished-goods inventories and places replenishment orders with a distributor
is likely to have all Key Point: Supply chain decision phases may be categorized as design, planning, or
operational, depending on the time frame during which the decisions made apply. Design decisions
constrain or enable good planning, which in turn constrains or enables effective operation. 12 four
cycles separated. Dell, in contrast, bypasses the retailer and distributor when it sells directly to

Prepared by: Regina T. Ildefonso 9

 Data Center College of the Philippines – Laoag City
Supply Chain Management in Hospitality Industry

Each cycle consists of six subprocesses as shown in the figure below. Each cycle starts with the
supplier marketing the product to customers. A buyer then places an order that is received by the
supplier. The supplier supplies the order, which is received by the buyer. The buyer may return some
of the product or other recycled material to the supplier or a third party. The cycle of activities then
begins all over again. Depending on the transaction in question, the subprocesses in the figure can be
applied to the appropriate cycle.

Example: When customers shop online at Amazon, they are part of the customer order
cycle—with the customer as the buyer and Amazon as the supplier. In contrast, when Amazon orders
books from a distributor to replenish its inventory, it is part of the replenishment cycle— with Amazon
as the buyer and the distributor as the supplier. Within each cycle, the goal of the buyer is to ensure

Prepared by: Regina T. Ildefonso 10

 Data Center College of the Philippines – Laoag City
Supply Chain Management in Hospitality Industry

product availability and to achieve economies of scale in ordering. The supplier attempts to forecast
customer orders and reduce the cost of receiving the order. The supplier then works to fill the order
on time and improve efficiency and accuracy of the order fulfillment process. The buyer then works
to reduce the cost of the receiving process. Reverse flows are managed to reduce cost and meet
environmental objectives. Even though each cycle has the same basic subprocesses, there are a few
important differences among the cycles. In the customer order cycle, demand is external to the supply
chain and thus uncertain. In all other cycles, order placement is uncertain but can be projected based
on policies followed by the particular supply chain stage. For example, in the procurement cycle, a tire
supplier to an automotive manufacturer can predict tire demand precisely once the production
schedule at the manufacturer is known. The second difference across cycles relates to the scale of an
order. Whereas a customer buys a single car, the dealer orders multiple cars at a 13 time from the
manufacturer, and the manufacturer, in turn, orders an even larger quantity of tires from the supplier.
As we move from the customer to the supplier, the number of individual orders declines and the size
of each order increases. Thus, sharing of information and operating policies across supply chain stages
becomes more important as we move further from the end customer. A cycle view of the supply chain
is useful when considering operational decisions because it clearly specifies the roles of each member
of the supply chain. The detailed process description of a supply chain in the cycle view forces a supply
chain designer to consider the infrastructure required to support these processes.

Push/Pull View of Supply Chain Process

All processes in a supply chain fall into one of two categories depending on the timing of their
execution relative to end customer demand. With pull processes, execution is initiated in response to
a customer order. With push processes, execution is initiated in anticipation of customer orders based
on a forecast. Pull processes may also be referred to as reactive processes because they react to
customer demand. Push processes may also be referred to as speculative processes because they
respond to speculated (or forecasted) rather than actual demand. The push/pull boundary in a supply
chain separates push processes from pull processes as shown in the figure below

Prepared by: Regina T. Ildefonso 11

 Data Center College of the Philippines – Laoag City
Supply Chain Management in Hospitality Industry

Push processes operate in an uncertain environment because customer demand is not yet
known. Pull processes operate in an environment in which customer demand is known. They are,
however, often constrained by inventory and capacity decisions that were made in the push phase

A push/pull view of the supply chain is very useful when considering strategic decisions
relating to supply chain design. The goal is to identify an appropriate push/pull boundary such that
the supply chain can match supply and demand effectively

Example: The paint industry provides another excellent example of the gains from suitably adjusting
the push/pull boundary. The manufacture of paint requires production of the base, mixing of suitable
colors, and packing. Until the 1980s, all these processes were performed in large factories, and paint
cans were shipped to stores. These qualified as push processes, as they were performed to a forecast

Prepared by: Regina T. Ildefonso 12

 Data Center College of the Philippines – Laoag City
Supply Chain Management in Hospitality Industry

in anticipation of customer demand. Given the uncertainty of demand, the paint supply chain had
great difficulty matching supply and demand. In the 1990s, paint supply chains were restructured such
that mixing of colors was done at retail stores after customers placed their orders. In other words,
color mixing was shifted from the push to the pull phase of the supply chain even though base
preparation and 15 packing of cans were still performed in the push phase. The result is that customers
are always able to get the color of their choice, while total paint inventories across the supply chain
have declined

Key point to remember. A push/pull view of the supply chain categorizes processes based on whether
they are initiated in response to a customer order (pull) or in anticipation of a customer order (push).
This view is useful when considering strategic decisions relating to supply chain design.

Supply Chain Macro Processes in a Firm

All supply chain processes discussed in the two process views and throughout this book can
be classified into the following three macro processes, as shown in the figure below.

1. Customer Relationship Management (CRM): all processes that focus on the interface
between the firm and its customers

2. Internal Supply Chain Management (ISCM): all processes that are internal to the firm

3. Supplier Relationship Management (SRM): all processes that focus on the interface
between the firm and its supplier

Prepared by: Regina T. Ildefonso 13

 Data Center College of the Philippines – Laoag City
Supply Chain Management in Hospitality Industry

These three macro processes manage the flow of information, product, and funds required to
generate, receive, and fulfill a customer request. The CRM macro process aims to generate customer
demand and facilitate the placement and tracking of orders. It includes processes such as marketing,
pricing, sales, order management, and call center management. The ISCM macro process aims to fulfill
demand generated by the CRM process in a timely manner and at the lowest possible cost. ISCM
processes include the planning of internal production and storage capacity, preparation of demand
and supply plans, and fulfillment of actual orders.

Observe that all three macro processes are aimed at serving the same customer. For a supply
chain to be successful, it is crucial that the three macro processes are well integrated. The
organizational structure of the firm has a strong influence on the success or failure of the integration
effort. In many firms, marketing is in charge of the CRM macro process, manufacturing handles the
ISCM macro process, and purchasing oversees the SRM macro process—with little communication

Prepared by: Regina T. Ildefonso 14

 Data Center College of the Philippines – Laoag City
Supply Chain Management in Hospitality Industry

among them. It is not unusual for marketing 16 and manufacturing to have different forecasts when
making their plans. This lack of integration hurts the supply chain’s ability to match supply and demand
effectively, leading to dissatisfied customers and high costs. Thus, firms should structure a supply
chain organization that mirrors the macro processes and ensures good communication and
coordination among the owners of processes that interact with one anot

Prepared by: Regina T. Ildefonso 15