Unit 1 Supply Chain & Logistics Management KMBN OM01
Unit 1 Supply Chain & Logistics Management KMBN OM01
Unit 1 Supply Chain & Logistics Management KMBN OM01
Unit 1
A supply chain is a network between a company and its suppliers to produce and distribute a specific product to
the final buyer. This network includes different activities, people, entities, information, and resources. The
supply chain also represents the steps it takes to get the product or service from its original state to the
customer.
Supply chains are developed by companies so they can reduce their costs and remain competitive in the
business landscape.
A supply chain involves a series of steps involved to get a product or service to the customer. The steps include
moving and transforming raw materials into finished products, transporting those products, and distributing
them to the end user. The entities involved in the supply chain include producers, vendors, warehouses,
transportation companies, distribution centers, and retailers.
The elements of a supply chain include all the functions that start with receiving an order to meeting the
customer’s request. These functions include product development, marketing, operations, distribution, finance,
and customer service.
A supply chain is a network between a company and its suppliers to produce and distribute a specific
product or service.
The entities in the supply chain include producers, vendors, warehouses, transportation companies,
distribution centers, and retailers.
The functions in a supply chain include product development, marketing, operations, distribution,
finance, and customer service.
Supply chain management results in lower costs and a faster production cycle.
The objective of every supply chain is to maximize the overall value generated. The value of a supply chain
generates is the difference between what the final product is worth to the customer and the effort of the supply
chain expands in filling the customer’s request. For most commercial supply chains, the value will be strongly
correlated with supply chain profitability, the difference between the revenue generated from the customer and
the overall cost across the supply chain.
For most commercial supply chains, the value will be strongly correlated with supply chain profitability, the
difference between the revenue generated from the customer and the overall cost across the supply chain.
For example, a customer purchasing a computer from Dell pays Rs.20,000 which represents the revenue the
supply china receives. Dell and other stages of the supply chain incur costs to convey information, produce
components, store them, transport them, transfer funds, and so on.
The difference between the Rs.20,000 that the customer paid and the sum of all costs incurred by the supply
chain to produce and distribute the computer represents the supply chain profitability. Supply chain profitability
is the total profit to be shared across all supply chain. Supply chain success should be measured in terms of
supply chain profitability and not in terms of the profits at an individual stage.
Stage 1: Plan
Planning involves a wide range of activities. Companies must first decide on their operations strategy. Whether
to manufacture a product or component or buy it from a supplier is a major decision. Companies must weigh the
benefits and disadvantages of different options presented by international supply chains.
Options include:
Manufacturing a product component domestically
Manufacturing a component in a foreign market by setting up international production facilities
Buying a component from a foreign supplier
Buying a component from a domestic supplier
If companies are manufacturing products, they must decide how they will be produced.
Goods can be:
Make to stock (produced and stored, awaiting customer orders);
Make to order (constructed in response to a customer order);
Configure to order (partially manufactured the product and completed it after a firm customer order is
received); or
Engineer to order (manufactured a product to unique specifications provided by a customer).
Sometimes, goods can be produced by a combination of these methods. Companies must also decide whether
they will outsource manufacturing. This operations planning is essential because these decisions influence the
supply chain.
Planning also involves mapping out the network of manufacturing facilities and warehouses, determining the
levels of production and specifying transportation flows between sites. It also involves assessing how to
improve the global supply chain and its management processes.
When planning, companies should ensure that their supply chain management strategies align to business
strategies, that communication plans for the entire supply chain are decided and that methods of measuring
performance and gathering data are established before planning begins.
Stage 2: Source
This aspect of supply chain management involves organizing the procurement of raw materials and
components. Procurement is the acquisition of goods and services at the best possible price, in the right quantity
and at the right time.
When sources have been selected and vetted, companies must negotiate contracts and schedule deliveries.
Supplier performance must be assessed and payments to the suppliers made when appropriate. In some cases,
companies will be working with a network of suppliers. This will involve working with this network, managing
inventory and company assets and ensuring that export and import requirements are met.
Stage 3: Make
This stage is concerned with scheduling of production activities, testing of products, packing and release.
Companies must also manage rules for performance, data that must be stored, facilities and regulatory
compliance.
Stage 4: Deliver
The delivery stage encompasses all the steps from processing customer inquiries to selecting distribution
strategies and transportation options. Companies must also manage warehousing and inventory or pay for a
service provider to manage these tasks for them.
The delivery stage includes any trial period or warranty period, customers or retail sites must be invoiced and
payments received, and companies must manage import and export requirements for the finished product.
Stage 5: Return
Return is associated with managing all returns of defective products, including identifying the product
condition, authorizing returns, scheduling product shipments, replacing defective products and providing
refunds.
Returns also include “end-of-life” products (those that are in the end of their product lifetime and a vendor will
no longer be marketing, selling, or promoting a particular product and may also be limiting or ending support
for the product).
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. The processes in a Supply Chain are divided into series of cycles,
each performed at the interface between two successive stages of a Supply Chain. Cycle view of Supply Chain
is useful in making operational decisions as role of each member of Supply Chain is clearly defined.
Key Issues in SCM
Network Design
The second component of a supply chain strategy is network design. This involves determining the optimal
structure of the supply chain, including the number and location of facilities, the mode of transportation, and the
allocation of inventory. The goal of network design is to create a supply chain that is efficient, flexible, and
responsive to customer needs.
Supplier Management
The third component of a supply chain strategy is supplier management. This involves selecting and managing
suppliers to ensure that they meet the organization’s requirements for quality, cost, and delivery. Effective
supplier management includes developing strong relationships with suppliers, monitoring supplier performance,
and collaborating with suppliers to improve supply chain performance.
Demand Management
The fourth component of a supply chain strategy is demand management. This involves understanding customer
needs and developing strategies to meet those needs. Effective demand management includes developing
accurate demand forecasts, managing demand variability, and collaborating with customers to improve supply
chain performance.
Inventory Management
The fifth component of a supply chain strategy is inventory management. This involves managing inventory
levels to ensure that the right products are available at the right time and in the right quantity. Effective
inventory management includes developing accurate inventory forecasts, managing inventory variability, and
optimizing inventory levels to minimize costs and maximize service levels.
Logistics Management
The sixth component of a supply chain strategy is logistics management. This involves managing the movement
of goods and information through the supply chain. Effective logistics management includes selecting the
optimal mode of transportation, managing transportation costs, and optimizing the flow of goods through the
supply chain.
Performance Measurement and Improvement
The final component of a supply chain strategy is performance measurement and improvement. This involves
measuring and monitoring supply chain performance and using that information to identify areas for
improvement. Effective performance measurement includes developing key performance indicators (KPIs),
monitoring KPIs, and using the results to improve supply chain performance.
“The major trends in business right now — low-cost country sourcing, outsourcing, customization,
globalization — all create tremendous complexities in a supply chain,” said Steve Matthesen, vice president and
global leader for supply chain at Boston Consulting Group, in a special business operations report. “In most
cases, however, companies have not changed how they manage this critical part of the business.
According to the Indian Institute of Materials Management, “Business today is in a global environment [and]
companies are going truly global with Supply Chain Management (SCM)… Companies have changed the ways
in which they manage their operations and logistics activities. Changes in trade, the spread and modernization
of transport infrastructures and the intensification of competition have elevated the importance of flow
management to new levels.”
The following best practices in supply chain management offer a critical look at best-in-class manufacturers and
what they are doing to implement the most effective supply chains.
1. Set up your supply chain council
Without an internal council of leaders in place, your supply chain may lack a clear strategy for efficiency and
functionality. There’s also a good chance an existing supply chain strategy will not align with the company’s
overall strategy if your organization doesn’t have a governing body to synchronize the two. For example, if a
company goal is to improve inventory turns, your supply chain probably shouldn’t take in a container of raw
material requiring about 12 months to consume. By supporting your supply chain with a council of executive
leadership and lower level management, your council can improve cross-functional communication and
demonstrate the value of an organized supply chain — two barriers to success that often hinder operations
without a supply chain council.
2. Establish an appropriate and thoughtfully staffed supply chain structure.
Ideally, your supply chain will be staffed and structured in a way that maximizes effectiveness as well as
efficiency in order to bring the most benefit to your organization. Most organizations these days find that a
centralized strategy, implemented by specialized managers in their various business units is the most optimal
approach. Reportedly, this combination leads to more harmony between strategy and implementation, while
also resulting in the best service. In staffing your supply chain, you should be more focused on strategy than
simply transactional ability with your top leadership. These leaders should extend this strategic thinking toward
creating value using strong interpersonal skills (such as communication and relationship management)
internally as well as externally.
3. Identify areas where technology can help improve and streamline processes.
Approximately 79 percent of supply chain enterprises surveyed worldwide fault manually driven processes as
the cause for continued lack of supply chain visibility. Lack of visibility and another global concern, the
uncoordinated nature of supply chain processes can be solved with the automation provided by technology: “On
average, large companies report that their international supply chains are only 50 percent as automated as their
domestic supply chains. Overall, only 6 percent of companies report that they have highly automated end-to-end
and cross-functional processes.” Although improving efficiency in your supply chain is a key concern when
selecting software and technology, it’s backwards to structure your processes around technology. Instead,
review processes that are producing below standard to determine areas where technology can help improve, and
then select your software solutions to fit those needs. With appropriate technology in place, detailed reporting
data will be more accessible and accurate to better inform the supply chain council for performance measures as
well as strategic planning.
4. Maintain healthy supplier relationships
An important indicator of success in this industry is the health of your supplier relationships. These connections
should be maintained and cultivated on an ongoing basis, beyond the finalization of your deal. The best supplier
relationships are the ones with two-way communication between the buyer and seller. Your objectives should
include mechanism(s) to maintain the health of your relationship, goals for continuing improvement and value,
performance measurement and a platform for conflict resolution.
5. In procurement, look at total cost of ownership over price
Follow the example of best-in-class companies, and move away from the procurement practice of selecting a
supplier based completely on price. Instead, strategic sourcing involves understanding the total cost of
ownership/consumption (TCO) of a product or service. This makes more business sense when you remember
that the cost of acquisition for most products and services is only 25 to 40 percent of the TCO, while the rest is
comprised of operating, warehousing, and transportation costs, to name a few. Not surprisingly, your
procurement teams will need more collaboration with your suppliers in order to determine an accurate TCO.
6. Source suppliers strategically and with collaboration
Strategic selection of suppliers is at the heart of successful supply chain management, and adding a
collaborative element to strategic sourcing produces even better results. In a 2009 Industry Week article, J. Paul
Dittmann of the University of Tennessee noted that successful supply chains are proficient in five key pillars of
excellence: Talent, technology, internal collaboration, external collaboration, and change management.
Collaboration is at the heart. Take your sourcing beyond the purchasing department to engage your suppliers in
the decision-making process. Solicit their feedback on all areas of internal business or function that may affect
the success of your initiatives or processes. With collaborative strategic sourcing, you’ll enjoy streamlined
operations, reduced costs, and improved responsiveness.
7. Move contract management responsibility to the supply chain
Although potential savings are often negotiated during the procurement process, they are rarely fully realized.
This is most commonly because of a lapse in communication or lack of follow-through on contract compliance.
To combat this and actually realize those cost savings, best-in-class companies move contract management
under the supply chain. This allows the supply chain leader to leverage spend where there is greater opportunity
for reducing costs and mitigating risk, usually with services.
8. Optimize inventory for reduced cost
In any business, there’s a desire to reduce costs and improve the bottom line. This is especially true in times of
global economic downturn, like the one we’re currently subject to. In light of and in support of these efforts,
supply chain management should include a consistent look at optimizing inventory quantities. There’s a very
real cost of holding and storing inventory, and it’s almost always higher than the generally assumed 20 to 25
percent. In fact, “Research reveals that inventory holding costs could represent up to 60 percent of the cost of an
item that is held in inventory for 12 months,” as reported by Supply Chain Quarterly. To optimize your supply
chain inventory, include forecasting and demand planning.
9. Establish regular reviews to ensure efficiency and mitigate risk
Your supply chain council and leadership team members should be constantly reviewing procedures and
policies to ensure compliance, efficiency, and currency. This will help avoid process bottlenecks and help
streamline operations while mitigating the risk of theft, fraud, and the like. Risk mitigation in the supply chain
must adhere to some important steps: identifying all elements of risk, evaluating their probability of occurrence,
estimating the financial impact in the event of an incident, and prioritizing risks for appropriate monitoring and
prevention measures.
10. Be socially responsible and establish “green” initiatives
It’s no longer optional for your supply chain company to actively reduce its carbon footprint, instead, supply
chain organizations must become sustainable and socially responsible if they hope to thrive or even survive.
While the U.S. doesn’t yet have a carbon-trading regime, buyers are now considering environmental impact
when they choose suppliers. On a more general scale, social responsibility is also becoming more and more
significant in buyers’ estimation when making purchase decisions. A best-in-class supply chain organization
should have a measureable framework of policies and procedures designed to improve the workplace for the
greater good of employees, the organization itself, and also its community.
Obstacles of Streamlined SCM