MODULE 1: Supply Chain Management-An

Overview

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What Is Supply Chain Management?
•Supply chain management is a set of approaches
utilized to efficiently integrate suppliers,
manufacturers, warehouses, and stores, so that
merchandise is produced and distributed at the
right quantities, to the right locations, and at the
right time, in order to minimize system wide
costs while satisfying service level requirements.
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 What Is a Supply Chain?

• All parties involved, directly or indirectly, in fulfilling a

customer request
• Includes manufacturers, suppliers, transporters,
warehouses, retailers, and customers
• Within each organization, the supply chain includes all
functions involved in receiving and fulfilling a customer
request (new product development, marketing,
operations, distribution, finance, customer service)

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 What is a Supply Chain?
• Customer is an integral part of the supply chain
• Includes movement of products from suppliers to manufacturers
to distributors and information, funds, and products in both
directions
• May be more accurate to use the term “supply network” or
“supply web”
• Typical supply chain stages: customers, retailers, wholesalers,
distributors, manufacturers, suppliers

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What is a Supply Chain?

Stages of an Automotive Supply Chain

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Definitions
The design and management of seamless, value-added process
across organizational boundaries to meet the real needs of the
end customer
Institute for Supply Management
Managing supply and demand, sourcing raw materials and parts,
manufacturing and assembly, warehousing and inventory
tracking, order entry and order management, distribution across
all channels, and delivery to the customer
The Supply Chain Council

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 Flows in a Supply Chain

The Three Flows in a Supply Chain

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Supply Chain Flows
- Flows represent the direction and purposes of process sequences

Three Primary
Supply Chain
Flows

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The Value Chain

- The value chain is the transformation of raw material to customer

valued attributes
- The supply chain combines the best value-adding capabilities of
several organizations
The Value Chain

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Service Supply Chains

- Complex because the customer is also a supplier

- Patient at a hospital gets served, but also provides their body as
supply
- Flows are often multidirectional
- People add lots of customer/supplier variation

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 PC Industry Supply Chain
Tracing back the screen you stare at for the bulk of your time.

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A Rudimentary Supply Chain

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 The Objective of a Supply Chain
• Maximize net value generated
Supply Chain Surplus = Customer Value − Supply Chain Cost
• Example: a customer purchases a wireless router from Best Buy for $60
(revenue)
• Supply chain incurs costs (convey information, produce components, storage,
transportation, transfer funds, etc.)
• Difference between $60 and the sum of all of these costs is the supply chain
profitability
• Supply chain profitability is total profit to be shared across all stages of the
supply chain
• Success should be measured by total supply chain surplus, not profits at an
individual stage
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 The Objective of a Supply Chain
• Customer the only source of revenue
• Sources of cost include flows of information, products,
or funds between stages of the supply chain
• Effective supply chain management involves the
management of supply chain assets and product,
information, and fund flows to grow the total supply
chain surplus

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 The Objective of a Supply Chain
•To maximize overall value generated
•To meet consumer demand for guaranteed delivery of
high quality and low cost with minimal lead time
•To fulfill customer demand through efficient resources
•To maximize efficiency of distribution side
•Helps in better decision

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 Decision Phases in a Supply Chain

1. Supply chain strategy or design

• How to structure the supply chain over the next
several years
2. Supply chain planning
• Decisions over the next quarter or year
3. Supply chain operation
• Daily or weekly operational decisions

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 Supply Chain Strategy or Design
• Decisions about the configuration of the supply chain, allocation of resources,
and what processes each stage will perform
• Strategic supply chain decisions
• Outsource supply chain functions
• Locations and capacities of facilities
• Products to be made or stored at various locations
• Modes of transportation
• Information systems
• Supply chain design must support strategic objectives
• Supply chain design decisions are long-term and expensive to reverse – must
take into account market uncertainty
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 Supply Chain Planning
• Definition of a set of policies that govern short-term operations
• Fixed by the supply configuration from strategic phase
• Goal is to maximize supply chain surplus given established constraints
• Starts with a forecast of demand in the coming year
• Planning decisions:
• Which markets will be supplied from which locations
• Planned buildup of inventories
• Subcontracting
• Inventory policies
• Timing and size of market promotions
• Must consider demand uncertainty, exchange rates, competition over the time
horizon in planning decisions bschool.cms.ac.in
 Supply Chain Operation
• Time horizon is weekly or daily
• Decisions regarding individual customer orders
• Supply chain configuration is fixed and planning policies are
defined
• Goal is to handle incoming customer orders as effectively as
possible
• Allocate orders to inventory or production, set order due dates,
generate pick lists at a warehouse, allocate an order to a particular
shipment, set delivery schedules, place replenishment orders
• Much less uncertainty (short time horizon)
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 Process Views of 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 the 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.

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 Cycle View of Supply Chain Processes

Subprocesses in Each Supply Chain Process Cycle

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 Push/Pull View of Supply Chain Processes

• Supply chain processes fall into one of two categories

depending on the timing of their execution relative to
customer demand
• Pull: execution is initiated in response to a customer
order (reactive)
• Push: execution is initiated in anticipation of customer
orders (speculative)
• Push/pull boundary separates push processes from
pull processes
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 Push/Pull View – L.L. Bean

Push/Pull Processes for the L.L. Bean Supply Chain (Make to Stock)
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 Push/Pull View – Ethan Allen

Push/Pull Processes for Ethan Allen Supply Chain for Customized Furniture (Build to Order)

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 Supply Chain Macro Processes
Supply chain processes discussed in the two views can be
classified into
1. Customer Relationship Management (C RM):
– all processes at the interface between the firm and its
customers
2. Internal Supply Chain Management (I SCM):
– all processes that are internal to the firm
3. Supplier Relationship Management (S RM):
– all processes at the interface between the firm and its
suppliers bschool.cms.ac.in
Supply Chain Macro Processes

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 Examples of Supply Chains
•Gateway and Apple
•Zara
•W.W. Grainger and McMaster-Carr
•Toyota
•Amazon
•Macy's

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Bullwhip effect
•Inventories are progressively larger moving backward
through the supply chain
•The bullwhip effect is the distortion of demand and
increased volatility that occurs as forecasts and orders
move from the retailer up to the manufacturer. When
a spike in demand occurs, each party in the supply
chain adds additional products to their orders to act
as a buffer.
•https://www.youtube.com/watch?v=_bLHU0jAsZg
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Evolution of Supply Chain Management
Further Refinement of
SCM Capabilities

SCM Formation/
Extensions

JIT, TQM, BPR,

Alliances

Inventory Management/Cost
Optimization

Traditional Mass Manufacturing

1950s 1960s 1970s 1980s 1990s 2000s Beyond

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 How Is Strategic Fit Achieved?

1. Understanding the customer and supply chain

uncertainty
2. Understanding the supply chain capabilities
3. Achieving strategic fit

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Step 1: Understanding the Customer and Supply Chain Uncertainty
• Quantity of product needed in each lot
• Response time customers are willing to tolerate
• Variety of products needed
• Service level required
• Price of the product
• Desired rate of innovation in the product
• Demand uncertainty – uncertainty of customer demand for a product
• Implied demand uncertainty – resulting uncertainty for only the portion of the
demand that the supply chain plans to satisfy based on the attributes the
customer desires

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Implied Uncertainty (Demand and Supply) Spectrum

Figure The Implied Uncertainty (Demand and Supply) Spectrum

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Step 2: Understanding Supply Chain Capabilities
• How does the firm best meet demand?
• Supply chain responsiveness is the ability to
• Respond to wide ranges of quantities demanded
• Meet short lead times
• Handle a large variety of products
• Build highly innovative products
• Meet a high service level
• Handle supply uncertainty
• Responsiveness comes at a cost
• Supply chain efficiency is the inverse to the cost of making and delivering the product to the
customer
• The cost-responsiveness efficient frontier curve shows the lowest possible cost for a given level
of responsiveness
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Responsiveness Spectrum

Figure The Responsiveness Spectrum

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 Zone of Strategic Fit
Step 3: Achieving Strategic Fit
Ensure that the degree of supply chain
responsiveness is consistent with the implied
uncertainty
Assign roles to different stages of the supply chain
that ensure the appropriate level of
responsiveness
Ensure that all functions maintain consistent
strategies that support the competitive strategy

Tailoring the Supply Chain

Achieve strategic fit while serving many customer
segments with a variety of products across multiple
channels
Requires sharing operations for some links in the supply
chain, while having separate operations for other links
Figure: Finding the Zone of Strategic Fit
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Roles and Allocations

Different Roles and Allocations of Implied Uncertainty for a Given Level of Supply
Chain Responsiveness
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 Efficient and Responsive Supply Chains
Table : Comparison of Efficient and Responsive Supply Chains

Blank Efficient Supply Chains Responsive Supply Chains

Primary goal Supply demand at the lowest cost Respond quickly to demand

Maximize performance at a Create modularity to allow postponement

Product design strategy
minimum product cost of product differentiation
Lower margins because price is a Higher margins because price is not a
Pricing strategy
prime customer driver prime customer driver
Maintain capacity flexibility to buffer
Manufacturing strategy Lower costs through high utilization
against demand/supply uncertainty
Maintain buffer inventory to deal with
Inventory strategy Minimize inventory to lower cost
demand/supply uncertainty
Reduce, but not at the expense of Reduce aggressively, even if the costs are
Lead-time strategy
costs significant
Select based on speed, flexibility,
Supplier strategy Select based on cost and quality
reliability, and quality

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 Financial Measures of Performance
1. Return on assets (ROA) measures the return earned on each dollar invested by
the firm in assets

2. From a shareholder perspective, return on equity (ROE) is the main summary

measure of a firm’s performance

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 Financial Measures of Performance
3. An important ratio that defines financial leverage is accounts payable turnover (A PT)

4. ROA can be written as the product of two ratios – profit margin and asset turnover

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 Financial Measures of Performance
5. Key components of asset turnover are accounts receivable turnover (A RT);
inventory turnover (INVT); and property, plant, and equipment turnover (PPET)

6. Cash-to-cash (C2C) cycle roughly measures the average amount time from when
cash enters the process as cost to when it returns as collected revenue

Measures not part of Financial statements

Markdowns: discounts required to convince customers to buy excess inventory
Lost sales: represent customer sales that did not materialize because of the absence of products the
customer wanted to buy
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 Framework for Supply Chain Decisions

Figure : Supply Chain Decision-Making Frame work

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 Drivers of Supply Chain Performance
1. Facilities : The physical locations in the supply chain network where product is stored,
assembled, or fabricated
2. Inventory : All raw materials, work in process, and finished goods within a supply chain
3. Transportation : Moving inventory from point to point in the supply chain
4. Information : Data and analysis concerning facilities, inventory, transportation, costs,
prices, and customers throughout the supply chain
5. Sourcing : Who will perform a particular supply chain activity
6. Pricing : How much a firm will charge for the goods and services that it makes available in
the supply chain
Each driver affects the balance between responsiveness and efficiency
and the resulting strategic fit. Thus, it is important for supply chain
designers to structure the six drivers appropriately to achieve strategic fit.
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 Facilities
• Role in the supply chain
• Production sites and storage sites
• Increase responsiveness by increasing the number of facilities, making them more flexible, or increasing
capacity
• Tradeoffs between facility, inventory, and transportation costs
▪ Increasing number of facilities increases facility and inventory costs, decreases transportation costs and
reduces response time
▪ Increasing the flexibility or capacity of a facility increases facility costs but decreases inventory costs and
response time
• Capability
▪ Flexible, dedicated, or a combination of the two
▪ Product focus or a functional focus
• Location
▪ Where a company will locate its facilities
▪ Centralize for economies of scale, decentralize for responsiveness
▪ Consider macroeconomic factors, quality of workers, cost of workers and facility, availability of
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 Facilities
• Capacity
▪ A facility’s capacity to perform its intended function or functions
▪ Excess capacity – responsive, costly
▪ Little excess capacity – more efficient, less responsive ▪ Product variety
• Demand Allocation ▪ Volume contribution of
▪ Markets each facility will serve top 20 percent SKU's
▪ Revisited as conditions change and customers
• Facility-Related Metrics ▪ Average production
▪ Capacity batch size
▪ Utilization ▪ Production service level
▪ Processing/setup/down/idle time
▪ Quality losses
▪ Production cost per unit
▪ Theoretical flow/cycle time of production
▪ Actual average flow/cycle time
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 Inventory

• Role in the Supply Chain

• Mismatch between supply and demand Material flow time, the
• Exploit economies of scale time that elapses
• Reduce costs between the point at
which material enters
• Improve product availability the supply chain to the
• Affects assets, costs, responsiveness, material flow time point at which it exits
• Overall Trade-Off Throughput, the rate at
which sales occur
• Increasing inventory generally makes the supply chain
Little’s law
more responsive
I = DT
• A higher level of inventory facilitates a reduction in where
production and transportation costs because of improved I = flow time, T =
economies of scale throughput, D = demand
• Inventory holding costs increase
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Components of Inventory Decisions
• Cycle Inventory
• Average amount of inventory used to satisfy demand between supplier shipments
• Function of lot size decisions
• Safety Inventory
• Inventory held in case demand exceeds expectations
• Costs of carrying too much inventory versus cost of losing sales
• Seasonal Inventory
• Inventory built up to counter predictable variability in demand
• Cost of carrying additional inventory versus cost of flexible production
• Level of Product Availability
• The fraction of demand that is served on time from product held in inventory
• Trade off between customer service and cost
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 Components of Inventory Decisions
• Inventory-Related Metrics
• C2C cycle time
• Average inventory
• Inventory turns
• Products with more than a specified number of days of inventory
• Average replenishment batch size
• Average safety inventory
• Seasonal inventory
• Fill rate
• Fraction of time out of stock
• Obsolete inventory

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 Transportation
• Role in the Supply Chain
• Moves inventory between stages in the supply chain
• Affects responsiveness and efficiency
• Faster transportation allows greater responsiveness but lower efficiency
• Also affects inventory and facilities
• Allows a firm to adjust the location of its facilities and inventory to find the right
balance between responsiveness and efficiency
• Components of Transportation Decisions
• Design of transportation network
▪ Modes, locations, and routes
▪ Direct or with intermediate consolidation points
▪ One or multiple supply or demand points in a single run
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 Transportation
• Choice of transportation mode
▪ Air, truck, rail, sea, and pipeline
▪ Information goods via the Internet
▪ Different speed, size of shipments, cost of shipping, and flexibility
• Transportation-Related Metrics
▪ Average inbound transportation cost
▪ Average income shipment size
▪ Average inbound transportation cost per shipment
▪ Average outbound transportation cost
▪ Average outbound shipment size
▪ Average outbound transportation cost per shipment
▪ Fraction transported by mode
• Overall Trade-off: Responsiveness Versus Efficiency
• The cost of transporting a given product (efficiency) and the speed with which that product is transported
(responsiveness)
• Using fast modes of transport raises responsiveness and transportation cost but lowers the inventory holding
cost
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 Information
• Role in the Supply Chain
• Improve the utilization of supply chain assets and the coordination of supply chain flows to
increase responsiveness and reduce cost
• Information is a key driver that can be used to provide higher responsiveness while
simultaneously improving efficiency
• Role in the Competitive Strategy
• Improves visibility of transactions and coordination of decisions across the supply chain
• Right information can help a supply chain better meet customer needs at lower cost
• More information increases complexity and cost of both infrastructure and analysis exponentially while
marginal value diminishes
• Share the minimum amount of information required to achieve coordination

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 Components of Information Decisions
• Demand Planning
• Best estimate of future demand
• Include estimation of forecast error
• Coordination and Information Sharing
• Supply chain coordination, all stages of a supply chain work toward the objective of maximizing total
supply chain profitability based on shared information
• Critical for success
• Sales and Operations Planning (S&OP)
• The process of creating an overall supply plan (production and inventories) to meet the anticipated level
of demand (sales)
• Can be used to plan supply chain needs and project revenues and profits
• Information-Related Metrics
• Forecast horizon
• Frequency of update
• Forecast error
• Variance from plan
• Ratio of demand variability to order variability
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 Sourcing
• Role in the Supply Chain
• Set of business processes required to purchase goods and services
• Will tasks be performed by a source internal to the company or a third party
• Should increase the size of the total surplus to be shared across the supply
chain

• Role in the Competitive Strategy

• Sourcing decisions are crucial because they affect the level of efficiency and
responsiveness in a supply chain
• Outsource to responsive third parties if it is too expensive to develop their
own
• Keep responsive process in-house to maintain control
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 Components of Sourcing Decisions
• In-House or Outsource
• Perform a task in-house or outsource it to a third party
• Outsource if it raises the supply chain surplus more than the firm can on its own
• Keep function in-house if the third party cannot increase the supply chain surplus or if the
outsourcing risk is significant
• Sourcing-Related Metrics
• Supplier Selection
• Days payable outstanding
• Number of suppliers, criteria for evaluation and selection
• Average purchase price
• Procurement • Range of purchase price
• Obtain goods and service within a supply chain • Average purchase quantity
• Goal is to decrease total cost of ownership and increase supply chain • Supply quality
surplus
• Supply lead time
• Percentage of on-time deliveries
• Supplier reliability

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 Pricing
• Role in the Supply Chain
• Pricing determines the amount to charge customers for goods and
services
• Affects the supply chain level of responsiveness required and the
demand profile the supply chain attempts to serve
• Pricing strategies can be used to match demand and supply
• Objective should be to increase firm profit

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 Components of Pricing Decisions
• Pricing and Economies of Scale
• The provider of the activity must decide how to price it appropriately to reflect economies
of scale
• Everyday Low Pricing Versus High-Low Pricing
• Different pricing strategies lead to different demand profiles that the supply chain must
serve
• Fixed Price Versus Menu Pricing
• If marginal supply chain costs or the value to the customer vary significantly along some attribute, it is
often effective to have a pricing menu
• Can lead to customer behavior that has a negative impact on profits
• Pricing-Related Metrics • Pricing-Related Metrics
• Profit margin • Average sale price
• Days sales outstanding • Average order size
• Incremental fixed cost per order • Range of sale price
• Incremental variable cost per unit • Range of periodic sales
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