SCM Unit 1

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Supply Chain Management - Networks

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.

• Producer storage with direct shipping


• Producer storage with direct shipping and in-transit merge (cross docking)
• Distributor storage with package carrier delivery
• Distributor storage with last mile delivery
• Producer or distributor storage with costumer pickup
• Retail storage with customer pickup
The supply chain network basically deals with three major entities: Producer, Distributor
and Merchant. Two different options are available, i.e., customer pickup or door
delivery. For example, if the door delivery option is opted for, there is transport between
producer and distributor, distributor and merchant and producer and merchant.
The distribution system decision is made on the basis of the choice of the customers.
This in turn results in the demand for the product or products and cost of the distribution
arrangement.
New companies may come to a halt through the application of a single type of
distribution network. Mostly, companies go for merging of different types for distinct
products, different customers and different usage situations, coming back to the
different optimization models mentioned above. Now we will discuss each model in
brief.
Producer storage with direct shipping
In this model, goods are moved directly from the manufacturer’s location as the starting
point to the end customer’s location as the destination point bypassing the retailer. The
retailer is the person who takes the order and initiates the delivery request. This option
is also called drop-shipping, with product delivered directly from the manufacturer’s
location to the customer’s destination.
Producer storage with direct shipping and in-transit merge
It is somewhat congruent to pure drop-shipping or moving, but the difference is that
pieces of the order come from different locations and they are merged into one so that
the customer gets a single delivery.
Distributor storage with package carrier delivery
This comes into action when the inventory is not owned by the manufacturers at the
plants; instead it is owned by the merchants/retailers in intermediate warehouses and
package carriers are used for shipment of goods from the intermediate location to the
final customer.
Distributor storage with last mile delivery
This type results when the merchant/retailer delivers the goods ordered by the customer
to the customer’s home instead of using a package carrier.
Producer/distributor storage with customer pickup
In this type, the inventory is stored at the warehouse owned by the manufacturer or
producer but the customers place their orders online or through phone and then come
to pick up points allotted for collecting their orders.
Retail storage with customer pickup
This is mostly applied on situations when inventory is locally stored at retail stores;
customers walk into the retail shop or order something online or on the phone and pick
it up at the retail store.

Supply Chain Management - Integration


Supply chain integration can be defined as a close calibration and collaboration within a
supply chain, mostly with the application of shared management information systems. A
supply chain is made from all parties that participate in the completion of a purchase,
like the resources, raw materials, manufacturing of the product, shipping of completed
products and facilitating services.
There are different levels of supply chain integration. We will understand this with the
help of an example of a computer manufacturing company. The initial step in integration
shall include choosing precise merchants to supply certain inputs and ensuring
compliance for them for supplying certain amount of inputs within the year at a set cost.
This assures that the company has the appropriate materials required to produce the
expected output of computers during the year. In the meanwhile, this computer
company may sign a bond with a large supplier of circuit boards; the bond expects it to
deliver a precise quantity at precise times within a year and fix a price that will be
effective during the bond year.
If we move to a higher level, the next step would be to integrate the companies more
closely. The circuit board supplier may construct a plant close to the assembly plant and
may also share production software. Hence, the circuit board company would be able to
see how many boards are required in the upcoming month and can construct them in
time, as the company requires them in order to meet its sales demand.
Further higher level is referred as vertical integration. This level starts when the supply
chain of a company is actually owned by the company itself. Here, a computer company
may buy the circuit board company just to ensure a devoted supply of elements.

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.

Differences in Push and Pull System


The major differences between push and pull view in supply chain are as follows −
• In the push system, the implementation begins in anticipation of customer order
whereas in the pull system, the implementation starts as a result of customer’s
order.
• In the push system, there is an uncertainty in demand whereas in pull system, the
demand remains certain.
• The push system is a speculative process whereas the pull system is a reactive
process.
• The level of complexity is high in the push system whereas it is low in the pull
system.
• The push based system concentrates on resources allocation whereas the pull
system stresses on responsiveness.
• The push system has a long lead time whereas the pull system has a short lead
time.
• The push system assists in supply chain planning whereas the pull system
facilitates in order completion.
To conclude, the push based supply chain integrations works with an objective of
minimizing the cost whereas the pull based supply chain integration works with an
objective to maximize the services it provides.

Push & PUll System


Mostly we find a supply chain as merger of both push and pull systems, where the
medium between the stages of the push-based and the pull-based systems is referred
as the push–pull boundary.
The terms push and pull were framed in logistics and supply chain management, but
these terms are broadly used in the field of marketing as well as in the hotel distribution
business.

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 three primary decision phases of supply chain management are:

1. Supply chain design (Strategy)

2. Supply chain management decision (Planning)

3. Operational level (Operation)

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.

The higher authority or senior management is in charge of all strategic choices.


Manufacturing the material, factory site (which should be easy for transporters to load
material and dispatch at their specified destination), warehouse location (for storage of
completed product or products), and many other considerations are among them.
Supply Chain Planning:

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.

Supply Chain Operations:

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.

The higher authority or senior management is in charge of all strategic choices.


Manufacturing the material, factory site (which should be easy for transporters to load
material and dispatch at their specified destination), warehouse location (for storage of
completed product or products), and many other considerations are among them.

SUPPLY CHAIN MODEL

The Continuous Model


A continuous model is a supply chain built for continued, scheduled delivery of
goods. This model ensures a continued, steady cadence of products and
resources. It only exists in an environment with supply and demand stability,
typically with mature supply chains for established brands, and requires
minimal variation in the customer demand profile. PepsiCo is a well-known
example of a continuous supply chain model. The company’s family of drinks
and foods maintains a large customer base with little to no variety in demand
no matter the season or market conditions. PepsiCo has set up the logistics of
its delivery system to continuously receive ingredients to produce its food and
beverages, and likewise continuously restock vendors.

The Fast Model


A fast model is most often used by businesses that manufacture finished
products with a short market lifecycle, making it the most common for the
delivery of products considered to be trendy. This model applies when a
business changes its products frequently, delivering them to market before a
trend loses its relevance. One example is Nike. A leader in active-wear
fashion, Nike frequently sets up delivery systems of new supplies and
information to create and then sell new shoes and other apparel before that
particular trend’s time has passed. A short time later, the company will set up
a new fast supply chain for the next wave of trendy products.

The Efficient Model


The efficient chain model is best for businesses that are in highly competitive
environments and must strive for high efficiency in their delivery logistics to
retain a competitive advantage. This model prioritizes proper inventory
management and maximizing output from production equipment and labor.
General Mills uses an efficient chain model as it develops products relatively
similar to its competitors and sells to the exact same audience as the
competition. With tight competition and thin margins in the breakfast cereal
market, General Mills knows that a lot of its profit will be found in reducing
costs along the supply chain while ensuring vendors can keep their products
in stock.

The Agile Model


There are four components a supply chain must have to be considered an
agile model: virtual integration, process alignment, a network base and market
sensitivity. Virtual integration requires the business to track market demand
changes in real time. Process alignment is about sharing supply chain
responsibilities across the business. This is achieved by keeping a co-
managed inventory, utilizing collaborative product design and running all parts
of the supply chain in sync with each other. Network-based means that an
equal contribution is made by every actor in the supply chain. The market
sensitivity component changes the rate of production immediately with any
changes in demand. This model is a great fit for businesses that exist in
markets with a high degree of demand variation. Such is the case for fashion
company ZARA. ZARA exhibits agility by keeping its designers vigilant in the
spotting of new trends. As soon as ZARA’s designers identify a potential
trend, they immediately draw up sketches and order new materials.

The Custom-Configured Model


Essentially, a combination of the agile and continuous flow models, a custom-
configured model is ideal in scenarios where multiple product configurations
are required. Whenever there are consumer customization options, it’s likely
that a custom-configured model is in use. This can be seen in a company like
L.L. Bean, which invites customers to customize their backpacks before
placing an order. The market for backpacks stays pretty consistent, aside from
the demand spike in the late summer, but L.L. Bean has to be prepared for
when one feature of customization becomes particularly more or less popular.

The Flexible Model


The flexible model provides businesses the ability to meet peaks of high
demand as well as long periods where demand is low. There are three
components a supply chain must have to be considered a flexible model: part
segmentation, accurate stocking algorithms and flexible planning. This is
ensured through diversifying suppliers and incorporating automation on
factory floors. Staples’ paper and writing utensil products are produced and
delivered via a flexible supply chain. Staples anticipates high demand during
back-to-school season and stocks its stores with excess notebooks, paper,
pens, pencils, rulers and other school supplies. The company also must
ensure that it has some stock, albeit less, of those products year-round. This
is achieved through flexibility: having multiple suppliers, many of whom are on
seasonal contracts, and perfecting the stocking algorithm so that the company
produces only what will be sold in the offseason.
Supply chains are the lifeblood of every business and the entire global
economy. Understanding models like this is inherent to IDB’s mission of
teaching and developing logistics practices, development, and technologies
between the U.S. military and private businesses. In continuing that mission,
IDB offers several courses on logistics and supply chains. Check
out LCELP, LOG 21, LOGTECH Advanced and LOGTECH Executive to
study the cutting-edge developments in supply chain development,
management, and leadership.
Supply Chain Flow
Supply chain management can be defined as a system
atic flow of materials, goods, and related information among suppliers, companies,
retailers, and consumers.

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.

The 3 Levels of Supply Chain Management:


Strategic, tactical and operational
The three levels of supply chain management are strategic, tactical and operational.
1. Strategic Planning
This level of supply chain management is responsible for developing long-term plans
that outline the company's overall objectives and goals. It includes identifying and
assessing the company's strengths and weaknesses, making strategic decisions about
where to focus resources, and creating a vision for the future.
This level of planning looks at the big picture and focuses on long-term decisions. This
includes decisions such as:
- Single sources vs multiple suppliers
- Technology sharing
- Location decisions
2. Tactical Planning
Tactical planning involves developing specific plans to achieve specific objectives within
the scope of the strategic plan. These plans may include setting targets, establishing
priorities, and designing strategies to achieve those targets.
Tactical planning is focused on specific goals and objectives. This includes:
- Purchasing strategies
- Transportation
- Warehouse locations and distribution centers
- Distribution channels
3. Operational Execution
Operational execution is responsible for implementing the tactical plans into action to
achieve them. This includes coordinating with various departments within the company,
setting up systems and procedures to support execution, and ensuring that all
stakeholders are kept informed of progress throughout the process.
Operational planning is focused on day-to-day tasks and details how these tasks should
be carried out to achieve the company's objectives. This includes:
- Setting schedules
- Maintaining inventory levels
- Coordinating resources
- Ensuring quality, on-time delivery and cost

Supply Chain Integration


Supply chain integration is a large-scale business strategy that brings as many links of
the chain as possible into a closer working relationship with each other. The goal is to
improve response time, production time, and reduce costs and waste. Every link in the
chain benefits. An integration may be done tightly through a merger with another firm in
the supply chain, or
loosely through sharing information and working more exclusively with particular
suppliers and customers. In the latter case, the supply chain isn’t truly “owned” by one
company, but the various links operate almost as if one company to increase efficiency
and benefit everyone through steady, reliable business.
Horizontal Integration vs. Vertical Integration

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.

The Biggest Challenges in Supply Chains

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.

Vertical Integration-Specific Benefits

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