SCM Unit 1
SCM Unit 1
SCM Unit 1
The network design in supply chain determines its physical arrangement, design,
structural layout and infrastructure of the supply chain. Here the major decisions to be
made are on the number, locations and size of manufacturing plants and warehouses
and the assignment of retail outlets to warehouses, etc. This stage witnesses some
other major sourcing decisions as well. The basic time duration for planning horizon is
few years.
Many major decisions involving the long-term location, capacity, technology and
supplier selection have to be made by considering the probable uncertainties present in
the market development accompanied by changing economic and legal conditions.
The network design in supply chain concentrates mainly on the development of multi-
stage stochastic optimization methods required for decision support under demand,
freight rate and exchange rate uncertainty. Here, we will discuss the various strategies
to study the uncertainty and scenario modeling.
• Warehouse location − When companies expand their branches into various new
locations, they need new storage places as well. Here the company faces a
warehouse location problem.
• Within the set of probable choices in locations, the one that has minimal fixed
costs and operational costs by fulfilling the required demand is chosen.
• Traffic network design − With the growing population, the traffic in cities is
increasing. Because of the higher transportation demand, the traffic networks
have also to be widened. Since the budget allotted is usually limited, the major
issue is to determine which projects should be constructed to develop the flow
inside a traffic network.
• Reshoring − This phenomenon has emerged recently because of the rising cost
and other circumstances. It is the exercise of bringing outsourced products and
services back to the source point from which they were originally shipped. It
outlines the process of moving some or all producing back to its original source.
Network Models
Supply chain networks present different types of models that help us understand the
various optimization methods used for studying the uncertainty and scenario modeling.
There are six distinct supply chain network models, as given below.
Push System
In a push-based supply chain, the goods are pushed with the help of a medium, from
the source point, e.g., the production site, to the retailer, e.g., the destination site. The
production level is set in accordance with the previous ordering patterns by the
manufacturer.
A push-based supply chain is time consuming when it has to respond to fluctuations in
demand, which can result in overstocking or bottlenecks and delays, unacceptable
service levels and product obsolescence.
This system is based on the deliberation of customer’s demand. It tries to push as many
products into the market as possible. As a result, the production is time consuming
because the producer and the retailer struggle to react to the changes in the market.
Forecast or prediction plays an important role in the push system.
Optimum level of products can be produced through long term prediction. This
deliberative nature of the push system leads to high production cost, high inventory cost
as well as high shipment cost due to the company’s desire to halt products at every
stage.
Thus, in the push view of supply chain integration, the manager of a firm may
sometimes fail to satisfy or cope with the fluctuating demand pattern. This system leads
to high inventory and high size of batches.
Here, the companies focus more on minimizing the cost of supply chain and neglect the
responsiveness. This system models challenges along with demand management and
transportation management.
Pull System
The pull-based supply chain is based on demand-driven techniques; the procurement,
production and distribution are demand-driven rather than predicting. This system
doesn’t always follow the make-to-order production. For example, Toyota Motors
Manufacturing produces products yet do not religiously produce to order. They follow
the supermarket model.
According to this model, limited inventory is kept and piled up as it is consumed. Talking
about Toyota, Kanban cards are used to hint at the requirement of piling up inventory.
In this system, the demand is real and the company responds to the customer
demands. It assists the company in producing the exact amount of products demanded
by the clients.
The major drawback in this system is that in case the demand exceeds than the amount
of products manufactured, then the company fails to meet the customer demand, which
in turn leads to loss of opportunity cost.
Basically in the pull system, the total time allotted for manufacturing of products is not
sufficient. The production unit and distribution unit of the company rely on the demand.
From this point of view, we can say that the company has a reactive supply chain.
Thus, it has less inventories as well as variability. It minimizes the lead time in the
complete process. The biggest drawback in pull based supply chain integration is that it
can’t minimize the price by ranking up the production and operations.
To present an example, Wal-Mart implements the push vs. pull strategy. A push and
pull system in business represents the shipment of a product or information between
two subjects. Generally, the consumers use pull system in the markets for the goods or
information they demand for their requirements whereas the merchants or suppliers use
the push system towards the consumers.
In supply chains, all the levels or stages function actively for the push and the pull
system. The production in push system depends on the demand predicted and
production in pull system depends on absolute or consumed demand.
The medium between these two levels is referred as the push–pull boundary or
decoupling point. Generally, this strategy is recommended for products where
uncertainty in demand is high. Further, economies of scale play a crucial role in
minimizing production and/or delivery costs.
For example, the furniture industries use the push and pull strategy. Here the production
unit uses the pull-based strategy because it is impossible to make production decisions
on the basis on long term prediction. Meanwhile, the distribution unit needs to enjoy the
benefits of economy of scale so that the shipment cost can be reduced; thus it uses a
push-based strategy.
Decision Phases Of Supply Chain
Management
The many stages involved in supply chain management for taking an action or making a
decision connected to a product or service are known as decision phases.
The
many stages involved in supply chain management for taking an action or making a
decision connected to a product or service are known as decision phases.
Three decision phases are required for successful supply chain management:
information flow, product flow, and fund flow.
The three primary decision steps involved in the entire supply chain process will be
discussed below. The following are the three phases:
Supply Chain Strategy:
During this period, management makes the majority of the decisions. The decision to be
taken takes into account areas such as long-term forecasting and the cost of goods,
which can be highly costly if things go wrong. At this point, it’s critical to research market
conditions.
These selections are based on the current and future market conditions.
They make up the supply chain’s structural layout. The tasks and responsibilities of
each are put out after the layout is completed.
Demand and supply should be considered when planning the supply chain.A market
study should be conducted in order to comprehend customer demands.The second
factor to
evaluate is public knowledge and current information about the situation competition
and the techniques they employ to meet customer demands requirements. Distinct
markets have different demands, as we all know be approached in a different way.
This phase covers everything, from forecasting market demand to determining which
market will receive final goods to determining which factory will be built in this stage. All
firm participants or workers should make every effort to make the entire procedure as
adaptable as possible. If a supply chain design phase works well in short-term planning,
it is deemed successful.
The third and final decision phase entails making a variety of functional decisions in a
matter of minutes, hours, or days. The goal of this decision-making step is to reduce
ambiguity and improve performance. This phase includes everything from taking the
customer’s order to delivering the product to the consumer.
Consider a consumer who requests a product that your company produces. The
marketing department is initially in charge of receiving orders and forwarding them to
the production and inventory departments. The manufacturing department subsequently
reacts to the client’s request by delivering the requested item to the warehouse via a
proper media, where it is distributed to the consumer within a reasonable time limit. All
of the departments involved in this process must work together to improve performance
and reduce uncertainty.
They make up the supply chain’s structural layout. The tasks and responsibilities of
each are put out after the layout is completed.
Types
There are three different types of flow in supply chain management −
• Material flow
• Information/Data flow
• Money flow
Let us consider each of these flows in detail and also see how effectively they are
applicable to Indian companies.
Material Flow
Material flow includes a smooth flow of an item from the producer to the consumer. This
is possible through various warehouses among distributors, dealers and retailers.
The main challenge we face is in ensuring that the material flows as inventory quickly
without any stoppage through different points in the chain. The quicker it moves, the
better it is for the enterprise, as it minimizes the cash cycle.
The item can also flow from the consumer to the producer for any kind of repairs, or
exchange for an end of life material. Finally, completed goods flow from customers to
their consumers through different agencies. A process known as 3PL is in place in this
scenario. There is also an internal flow within the customer company.
Information Flow
Information/data flow comprises the request for quotation, purchase order, monthly
schedules, engineering change requests, quality complaints and reports on supplier
performance from customer side to the supplier.
From the producer’s side to the consumer’s side, the information flow consists of the
presentation of the company, offer, confirmation of purchase order, reports on action
taken on deviation, dispatch details, report on inventory, invoices, etc.
For a successful supply chain, regular interaction is necessary between the producer
and the consumer. In many instances, we can see that other partners like distributors,
dealers, retailers, logistic service providers participate in the information network.
In addition to this, several departments at the producer and consumer side are also a
part of the information loop. Here we need to note that the internal information flow with
the customer for in-house manufacture is different.
Money Flow
On the basis of the invoice raised by the producer, the clients examine the order for
correctness. If the claims are correct, money flows from the clients to the respective
producer. Flow of money is also observed from the producer side to the clients in the
form of debit notes.
In short, to achieve an efficient and effective supply chain, it is essential to manage all
three flows properly with minimal efforts. It is a difficult task for a supply chain manager
to identify which information is critical for decision-making. Therefore, he or she would
prefer to have the visibility of all flows on the click of a button.
Horizontal integration involves any moves related to the same “level” of the chain as the
organization making them. Integration could include merging with or purchasing firms
that supply similar products, such as a central processing unit (CPU) manufacturer
buying another in order to serve a larger swath of the CPU market. This type of
relationship could help the firm gain many more customers, and give them greater
control over the price and supply of CPUs.
Vertical integration refers to any moves that include different levels of the chain. It could
involve merging or buying out a link ahead of or before your organization, or possibly
developing your own capabilities for handling the entire supply chain, front to back. For
example, if the CPU manufacturer mentioned earlier also purchased a smartphone
product development firm, they would control more levels of their supply chain - the
major parts and the product. This type of acquisition could gain the firm greater control
over their costs, net them a larger share of profits, and reduce waste and time spent in
production.
Before bothering with the specifics of integration, it’s important to understand what
problems plague supply chains in the first place:
• Order Changes and Cancellations: This happens at the end of the supply chain, and sends
reverberations throughout. The retailer is stuck with excess product, the wholesaler deals with
fewer orders and backing up inventory, and every other supplier feels the waves. Plus,
consumer whim dictates changes and cancellations, meaning there’s little way to predict it, and
every case could have different reasoning.
• Workers Unavailable: Companies provide quotes and production orders based on expected
capacity, and when workers are ill or otherwise unexpectedly absent, that can dramatically
affect a supplier’s capability. This scenario is especially true in the age of automation, where
fewer workers are required but each is responsible for overseeing the smooth production of
many more units.
• Production Facility Failure: Like with workers, unexpected mechanical or software problems
with manufacturing plants can devastate a supply chain, especially if it is operating on just-in-
time, Lean manufacturing methodologies.
• Late Delivery of Materials: This logistical problem can stem from a number of transportation
issues, from as mundane as a traffic collision to as severe as genuine theft and piracy,
depending on which regions the supply chain serves.
• Suppliers’ Conflicting Obligations: Independent suppliers all have one honest goal - make as
much money as possible by taking on as many orders as possible. In non-integrated chains, this
means they might have some tolerance for overlap between different customers’ orders. Should
one customer decide to increase production, another suddenly might be out of a production
facility because the supplier overcommitted.
• Adversarial Relationships: Whether for the conflicting obligations cited above, or for simple
reasons of maintaining secrecy and negotiation advantages, customers and suppliers may have
a relationship that’s more foe than friend. They don’t share risks or benefits and lose out on
potential gains from working more closely together.
• Transactional Relationships: Even when not adversarial, supplier and customer relationships
in non-integrated chains could be “just business,” emphasizing direct delivery and cost with no
added value. Every deal is a new negotiation, focused on the bottom line, and terribly short-
sighted.
• Limited Communications: Non-integrated supply chains may only talk to firms just one or two
links away from them, whether up or down the chain. If they have a buying relationship with the
link before them, focused on minimizing cost, and a selling relationship with the next link,
focused on maximizing profit, they can’t learn about bigger impending problems or greater
opportunities further up or down the chain.
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Vertical Integration-Specific Benefits