Introduction to Supply Chain Management

1.2.1 Basic Concepts of Supply Chain Management

1.2.1.1 Meaning of Supply Chain Management?
1.2.1.2 What is the process of Supply Chain Management?
1.2.1.3 Supply Chain Management Process Flow
1.2.1.4 Supply Chain Management Career Specializations
1.2.2 Basic Concepts of Key SCM processes (Purchasing, Stores and Inventory)
1.2.1 Concept of Purchasing
1.2.2 Concept of Stores/Warehouse
1.2.3 Concept of Inventory Management
1.4 Conclusion
1.4 Assignment
1.5 References

1.2.1 Basic Concepts of Supply Chain Management

1.2.1.1 Meaning of Supply Chain Management?
1.2.1.2 What is the process of Supply Chain Management?
1.2.1.3 Supply Chain Management Process Flow
1.2.1.4 Supply Chain Management Specializations
1.2.2 Basic Concepts of Key SCM processes (Purchasing, Stores and Inventory)
1.2.1 Concept of Purchasing
1.2.2 Concept of Stores/Warehouse
1.2.3 Concept of Inventory Management

1.1 BASIC CONCEPTS OF SUPPLY CHAIN MANAGEMENT

1.1.1 What is Supply Chain Management?
Supply Chain Management: Is the management of materials flow from the supplier to a
production environment (materials management) (inbound logistics) (supply logistics)
and management of merchandise/end products from a production environment to the
customers (physical distribution management)(outbound logistics)(marketing logistics).

SCM therefore brings together differing functional departments (purchasing

(procurement), stores, production, transport and marketing) in an organization and
differing organization (the organization itself, organization suppliers and the organization
customers) in management of materials flows.

SCM main objective is to facilitate business relationships between customer, firm

internal departments and suppliers through coordination and integration of material flow
operations, cost reduction and control.

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1.1.2 What is the process of Supply Chain Management?

Supply chain management is a procedure utilized by organizations to guarantee that

their supply chain is proficient and financially savvy. A supply chain is the accumulation
of steps that an organization takes to change crude materials into a last item. The five
fundamental parts of supply chain management are examined underneath −
Plan
The underlying phase of the supply chain process is the planning stage. We have to
develop a plan or technique keeping in mind the end goal to address how the products
and services will fulfill the demands and necessities of the clients. In this stage, the
planning ought to fundamentally center around outlining a procedure that returns most
extreme benefit.
For dealing with every one of the assets required for planning products and giving
services, a procedure must be outlined by the organizations. Supply chain management
predominantly centers around planning and developing an arrangement of
measurements.

Develop(Source)
In the wake of planning, the following stage includes developing or sourcing. In this
stage, we for the most part focus on building a solid association with providers of the
crude materials required for generation. This includes distinguishing reliable providers
as well as deciding distinctive planning techniques for transportation, delivery, and
installment of the item.

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Organizations need to choose providers to deliver the things and services they require
to develop their item. So in this stage, the supply chain administrators need to develop
an arrangement of valuing, delivery and installment forms with providers and
additionally make the measurements for controlling and enhancing the connections.
At last, the supply chain administrators can consolidate every one of these procedures
for handling their goods and services stock. This handling includes accepting and
looking at shipments, exchanging them to the assembling offices and approving
provider installments.
Make
The third step in the supply chain management process is the assembling or making of
products that were demanded by the client. In this stage, the products are planned,
created, tried, bundled, and synchronized for delivery.
Here, the undertaking of the supply chain director is to plan every one of the exercises
required for assembling, testing, bundling and readiness for delivery. This stage is
considered as the most metric-concentrated unit of the supply chain, where firms can
check the quality levels, generation yield and specialist profitability.

Deliver
The fourth stage is the delivery arrange. Here the products are delivered to the client at
the ordained area by the provider. This stage is essentially the coordinations stage,
where client orders are acknowledged and delivery of the goods is planned. The
delivery arrange is regularly alluded as coordinations, where firms team up for the
receipt of requests from clients, build up a system of distribution centers, pick bearers to
deliver products to clients and set up an invoicing framework to get installments.
Return
The last and last phase of supply chain management is alluded as the return. In the
stage, blemished or harmed goods are returned to the provider by the client. Here, the
organizations need to manage client questions and react to their protests and so forth.
This stage regularly has a tendency to be a risky area of the supply chain for some
organizations. The planners of supply chain need to find a responsive and adaptable
system for tolerating harmed, faulty and additional products once more from their clients
and encouraging the return procedure for clients who have issues with delivered
products.

1.3 Supply Chain Management Process Flow

What is Supply Chain Management Process Flow?
Supply chain management can be characterized as a precise flow of materials, goods,
and related information among providers, organizations, retailers, and shoppers.
Types
There are three unique types of flow in supply chain management −
 Material flow
 Information/Data flow
 Money flow

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Give us a chance to think about every one of these flows in detail and likewise perceive
how adequately they are relevant to Indian organizations.
Material Flow
Material flow incorporates a smooth flow of a thing from the maker to the buyer. This is
conceivable through different stockrooms among wholesalers, merchants and retailers.
The principle challenge we confront is in guaranteeing that the material flows as stock
rapidly with no stoppage through various focuses in the chain. The speedier it moves,
the better it is for the venture, as it limits the money cycle.
The thing can likewise flow from the customer to the maker for any sort of repairs, or
trade for a finish of life material. At last, finished goods flow from clients to their
customers through various organizations. A procedure known as 3PL is set up in this
situation. There is likewise an inside flow inside the client organization.
Information Flow
Information/information flow includes the demand for citation, buy arrange, month to
month plans, building change demands, quality protests and reports on provider
execution from client side to the provider.
From the maker's side to the customer's side, the information flow comprises of the
introduction of the organization, offer, affirmation of procurement arrange, gives an
account of move made on deviation, dispatch points of interest, give an account of
stock, solicitations, and so on.
For a fruitful supply chain, customary connection is vital between the maker and the
purchaser. In numerous cases, we can see that different accomplices like merchants,
merchants, retailers, calculated specialist organizations partake in the information
arrange.
What's more, a few offices at the maker and purchaser side are additionally a piece of
the information circle. Here we have to take note of that the inward information flow with
the client for in-house produce is unique.

Money Flow

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Based on the receipt raised by the maker, the customers analyze the request for
rightness. In the event that the cases are right, money flows from the customers to the
individual maker. Flow of money is additionally seen from the maker side to the
customers as charge notes.
To put it plainly, to accomplish a proficient and viable supply chain, it is fundamental to
deal with every one of the three flows appropriately with insignificant endeavors. It is a
troublesome undertaking for a supply chain administrator to recognize which information
is basic for basic leadership. Accordingly, he or she would want to have the visibility of
all flows on the snap of a catch.

1.4 Supply Chain Management Career Specializations

The following is the key SCM specialization:-
1. Procurement (Purchasing Management)
2. Supply Chain Storage and Distribution
(Transport and Logistics Management)
3. Production and Operations Management
4. Marketing and Customer Service
5. Retail and Merchandise Management
6. Import and Export Management
(Clearing and Forwarding)
(International Trade)
(International Freight Logistics)

BASIC CONCEPTS OF KEY SCM PROCESSES

(PURCHASING, STORES AND INVENTORY)

Purchasing:
This includes selection of sources of supply finalization in terms of purchase, placement
of purchase orders, follow-up, maintenance of smooth relations with suppliers, approval
of payments to suppliers, evaluating and rating suppliers.

Purchasing is an important function of materials management. In any industry purchase

means buying of equipments, materials, tools, parts etc. required for industry. The
importance of the purchase function varies with nature and size of industry. In small
industry, this function is performed by works manager and in large manufacturing
concern; this function is done by a separate department. The moment a buyer places an
order he commits a substantial portion of the finance of the corporation which affects
the working capital and cash flow position. He is a highly responsible person who meets
various salesmen and thus can be considered to have been contributing to the public
relations efforts of the company. Thus, the buyer can make or mar the company’s image
by his excellent or poor relations with the vendors.

Objectives of Purchasing
The basic objective of the purchasing function is to ensure continuity of supply of raw
materials, sub-contracted items and spare parts and to reduce the ultimate cost of the
finished goods. In other words, the objective is not only to procure the raw materials at
the lowest price but to reduce the cost of the final product.
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Purchasing Procedure
The procedure describes the sequence of steps leading to the completion of an
identified specific task. The purchasing procedure comprises the following steps.
Recognition of The Need
The initiation of procedure starts with the recognition of the need by the needy section.
The demand is lodged with the purchase department in the prescribed Purchase
Requisition Form forwarded by the authorized person either directly or through the
Stores Department. The purchase requisition clearly specifies the details, such as,
specification of materials, quality and quantity, suggested supplier, etc. Generally, the
low value sundries and items of common use are purchased for stock while costlier and
special items are purchased according the production programmes. Generally, the
corporate level executives are authorized signatories to such demands. Such purchases
are approved by the Board of Directors. The reference of the approval is made on
requisition and a copy of the requisition is sent to the secretary for the purpose of
overall planning and budgeting.
The Selection of the Supplier
The process of selection of supplier involves two basic aspects: searching for all
possible sources and short listing out of the identified sources. The complete
information about the supplier is available from various sources, such as, trade
directories, advertisement in trade journals, direct mailing by the suppliers, interview
with suppliers, salesmen, suggestions from business associates, visit to trade fair,
participation in industries convention, etc. Identification of more and more sources helps
in selecting better and economical supplier. It should be noted that the low bidder is not
always the best bidder. When everything except price is equal, the low bidder will be
selected. The important considerations in the selection are the price, ability to supply
the required quantity, maintenance of quality standards, financial standing etc. It should
be noted that it is not necessary to go for this process for all types of purchases. For the
repetitive orders and for the purchases of low-value, small lot items, generally the
previous suppliers with good records are preferred.
Placing The Order
Once the supplier is selected the next step is to place the purchase order. Purchase
order is a letter sent to the supplier asking to supply the said material. At least six
copies of purchase order are prepared by the purchase section and each copy is
separately signed by the purchase officer. Out these copies, one copy each is sent to
store-keeper, supplier, accounts section, inspection department and to the department
placing the requisition and one copy is retained by the purchase department for record.

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Purchasing procedure

Follow Up Of the Order

Follow-up procedure should be employed wherever the costs and risks resulting
from the delayed deliveries of materials are greater than the cost of follow-up
procedure, the follow-up procedure tries to see that the purchase order is
confirmed by the supplier and the delivery is promised. It is also necessary to
review the outstanding orders at regular intervals and to communicate with the
supplier in case of need. Generally, a routine urge is made to the supplier by
sending a printed post card or a circular letter asking him to confirm that the
delivery is on the way or will be made as per agreement. In absence of any reply
or unsatisfactory reply, the supplier may be contact through personal letter,
phone, telegram and/or even personal visit.
Rceiving and Inspection Of The Materials
The receiving department receives the materials supplied by the vendor. The
quantity are verified and tallied with the purchase order. The receipt of the
materials is recorded on the specially designed receiving slips or forms which
also specify the name of the vendor and the purchase order number. It also
records any discrepancy, damaged condition of the consignment or inferiority of
the materials. The purchase department is informed immediately about the
receipt of the materials. Usually a copy of the receiving slip is sent to the
purchase department.
Payment of The Invoice
When the goods are received in satisfactory condition, the invoice is checked

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 before it is approved for the payment. The invoice is checked to see that the
goods were duly authorized to purchase, they were properly ordered, they are
priced as per the agreed terms, the quantity and quality confirm to the order, the
calculations are arithmetically correct etc
Maintenance Of The Records
Maintenance of the records is an important part and parcel of the efficient
purchase function. In the industrial firms, most of the purchases are repeat
orders and hence the past records serve as a good guide for the future action.
They are very useful for deciding the timings of the purchases and in selecting
the best source of the supply.
Maintenance Of Vendor Relations
The quantum and frequency of the transactions with the same key suppliers
provide a platform for the purchase department to establish and maintain good
relations with them. Good relations develop mutual trust and confidence in the
course of the time which is beneficial to both the parties. The efficiency of the
purchase department can be measured by the amount of the goodwill it has with
its suppliers.

Stores management or warehouse management:

This involves physical control of materials, preservation of stores, minimization of
obsolescence and damage through timely disposal and efficient handling,
maintenance of stores records, proper location and stocking. A store is also
responsible for the physical verification of stocks and reconciling them with book
figures. A store plays a vital role in the operations of a company.

2.2.1 Stores Management

Objectives of Stores Management

The Objectives of Stores management play a vital role in the operations of company.
It is in direct touch with the user departments in its day-to-day activities. The most
important purpose served by the stores is to provide uninterrupted service to users
departments/customers. Further, stores are often equated directly with money, as
money is locked up in the stores.

Functions of Stores
The functions of stores can be classified as follows:
1. To receive raw materials, components, tools, equipment’s and other items
and account for them.
2. To provide adequate and proper storage and preservation to the various
items.
3. To meet the demands of the consuming departments by proper issues and
account for the consumption.
4. To minimize obsolescence, surplus and scrap through proper codification,
preservation and handling.

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 5. To highlight stock accumulation, discrepancies and abnormal consumption
and effect control measures.
6. To ensure good house keeping so that material handling, material
preservation, stocking, receipt and issue can be done adequately.
7. To assist in verification and provide supporting information for effective
purchase action.

8. Item Classification/Codification
Codification is a process of representing each item by a number, the digit of which
indicates the group, the sub-group, the type and the dimension of the item. Many
organizations in the public and private sectors, railways have their own system of
codification, varying from eight to thirteen digits.

Objectives of Codification
The objectives of a rationalized material coding system are:
1. Bringing all items together.
2. To enable putting up of any future item in its proper place.
3. To classify an item according to its characteristics.
4. To give a unique code number to each item to avoid duplication and
ambiguity.
5. To reveal excessive variety and promote standardization and variety
reduction.
6. To establish a common language for the identification of an item.
7. To fix essential parameters for specifying an item.
8. To specify item as per national and international standards.
9. To enable data processing and analysis.

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2.3 Inventory control or management:
Inventories are assets held for sale, production, project or facilitating rendering of
services
Inventory generally refers to the materials in stock. Inventories represent those
items, which are either stocked for sale or they are in the process of manufacturing
or they are in the form of materials, which are yet to be utilized. The interval between
receiving the purchased parts and transforming them into final products varies from
industries to industries depending upon the cycle time of manufacture. It is,
therefore, necessary to hold inventories of various kinds to act as a buffer between
supply and demand for efficient operation of the system. Thus, an effective control
on inventory is a must for smooth and efficient running of the production cycle with
least interruptions.
Inventory Control(Stock Control) is the management of stock levels. Therefore
Inventory control ensures an organization has the right of goods, in the right place
and at the right time. Stock level must be neither too high or too low. It must be
maintained at a reasonable level. Inventory control basically deals with two
problems:
1. When should an order be placed? (Order level), and
2. How much should be ordered? (Order quantity).

Objectives of Stock Control:

a. To ensure the availability of goods when required
b. To account for the goods which have to be purchased
c. To reduce storage costs as much as possible
d. To minimize the risks of deterioration, wastage and theft
e. To maintain accurate records
f. To avoid over-stocking and under-stocking
g. To ensure adequate supply of products to customer and avoid shortages as
far as possible.
h. To make sure that the financial investment in inventories is minimum (i.e., to
see that the working capital is blocked to the minimum possible extent).
i. Efficient purchasing, storing, consumption and accounting for materials is an
important objective.
j. To maintain timely record of inventories of all the items and to maintain the
stock within the desired limits.
k. To ensure timely action for replenishment.
l. To provide a reserve stock for variations in lead times of delivery of materials.
m. To provide a scientific base for both short-term and long-term planning of
materials.
n. To stabilize production:
The demand for an item fluctuates because of the number of factors, e.g.,
seasonality, production schedule etc. The inventories (raw materials and
components) should be made available to the production as per the demand failing
which results in stock out and the production stoppage takes place for want of
materials. Hence, the inventory is kept to take care of this fluctuation so that the
production is smooth.

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 o. To take advantage of price discounts:
Usually the manufacturers offer discount for bulk buying and to gain this price
advantage the materials is bought in bulk even though it is not required
immediately. Thus, inventory is maintained to gain economy in purchasing.
p. To meet the demand during the replenishment period:
The lead time for procurement of materials depends upon many factors like
location of the source, demand supply condition, etc. So inventory is
maintained to meet the demand during the procurement (replenishment)
period.
q. To prevent loss of orders (sales):
In this competitive scenario, one has to meet the delivery schedules at 100
per cent service level, means they cannot afford to miss the delivery schedule
which may result in loss of sales. To avoid the organizations have to maintain
inventory.
r. To keep pace with changing market conditions:
The organizations have to anticipate the changing market sentiments and
they have to stock materials in anticipation of non-availability of materials or
sudden increase in prices.
s. Sometimes the organizations have to stock materials due to other reasons
like suppliers minimum quantity condition, seasonal availability of materials or
sudden increase in prices.

Benefits of Inventory Control

It is an established fact that through the practice of scientific inventory control,
following are the benefits of inventory control:
1. Improvement in customer’s relationship because of the timely delivery of
goods and service.
2. Smooth and uninterrupted production and, hence, no stock out.
3. Efficient utilization of working capital. Helps in minimizing loss due to
deterioration, obsolescence damage and pilferage.
4. Economy in purchasing.
5. Eliminates the possibility of duplicate ordering.

Stock Levels and Quantity

1 Overstocking
2 Maximum stock level
3 Re-order level
4 Minimum stock level
5 Under stocking

Maximum Stock Level

Is the stock level beyond which stocks should not be allowed to rise. It is
desirable that the level should be as low as possible but it must be adequate
according to the requirements of the enterprise.

Minimum Stock Level

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Is the stock level below which stocks should not allowed to fall. If stock falls
below this level there is possibility of production stoppages due to lack of
material. This level is also known as buffer stock.

Re-order Level
This is the point at which purchase order must be sent to the supplier for the
supply of more material. This level is higher than minimum stock level but
lower than the maximum stock level.

Re-order quantity
This is the quantity for which purchase order is placed.

Average stock level

This is the average of maximum and minimum stock levels. It is expressed as
under:-
Average stock level=(maximum stock level minimum stock level)/2

Formulae of stock levels

Mathematical formulae have been developed to establish stock levels.
These are:-

1. Re-order level=Max. C x Max. RP

2. Minimum stock level=RL-(NC x NRP)
3. Maximum stock level=Min. SL+RQ+(Min. C x Min. RP)
4. Re-order quantity=Max. SL-Min.SL-(Min. C x Min. RP)

Where:-
MAX. C=Maximum Consumption
MIN. C=Minimum Consumption
NC=Normal Consumption i.e average of Max. C and Min. C
MAX. RP=Maximum Re-Order Period or Lead Time
MIN. RP=Minimum Reorder Period
NRP. Normal Re Order Period
RQ.=Re Order Quantity
MIN. SL=Minimum Stock Level
MAX. SL=Maximum Stock Level

Example 1
The following information is provided for material PQ 251
Maximum Consumption=6000 units per week
Minimum Consumption=4000 units per week
Re-Order Period or Lead Time=4-6 weeks
Re-Order Quantity=30,000 Units

Required To Calculate
a) Re-Order Level

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 b) Minimum Stock Level
c) Maximum Stock Level
d) Average Stock Level

Solution
a) Re-Order Level=Max. C x Max. RP
=6000X6
=36000 Units

b) Minimum Stock Level=RL-(NC X NRP)

=36000-(5000X5)
=36000-25000
=11000 Units

c) Maximum Stock Level=Min. SL+RQ+(Min. C x Min. RP)

=11000+30000+(4000X4)
=11000+30000+16000
=57000 Units

d) Average Stock Level=(MAX. SL+MIN. SL)2

=(57000+11000)/2
=34000 Units

Working
NC=(6000+4000)/2=5000

NRP=(4+6)/2=5 Weeks

Example 2
From the following, find out the re-order quantity

Minimum Consumption 2000 Units Per Week

Minimum Re-Order Period 4 Weeks
Minimum Stock Level 3000 Units
Maximum Stock Level 1200 Units

Re-Order Quantity=Max. SL-Min. SL-(Min. C x Min. RP)

=12000-3000-(2000x4)
=12000-3000-8000
=1000 Units

Economic Order Quantity

The quantity at which cost of having stocks is minimum is known as
economic order quantity.

The cost of having stock can be broken down into two parts.

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 a) Holding costs which comprise:-
a. Cost of capital tied up
b. Warehousing
c. Deterioration
d. Obsolescence
e. Insurance
b) Ordering costs which comprise:
a. Clerical Costs
b. Telephone Charges

The formula of finding economic order quantity is given as under:-

Economic Order Quantity (E.O.Q)

Square Root 2CD/IP

Where:-
i. C=Delivery cost per batch
ii. D=Annual demand for product
iii. P=Cost price per item
iv. I=Stock holding cost per annum(expressed as a fraction of stock
value)

Example 3
A company has an annual demand for material ‘P’ of 25000 tons per
annum. The cost price per ton is Ksh 2000 and stock holding is 25% per
annum of stock value. Delivery cost per batch is Ksh 400. Calculate the
economic order quantity.

Answer
Economic Order (E.O.Q)= Square Root 2(400)(25000)/25% of Ksh 2000
= Square Root 2(400)(25000)/500
= Square Root 4000
=200 Units

It means that 200 units must be purchased at one time. If the batch size is more than or
less than 200 units then stockholding and ordering costs will be higher.

We can explain by the help of the following schedule and diagram that the stockholding
and ordering costs of batch size 200 units is minimum.
For this purpose, we have to calculate:-

Number of deliveries
It means how many times, stocks are purchased during the whole year.
Total annual demand is divided by the batch size in order to find out the number of
deliveries. If batch size is 200 units then:-

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(i) Number of deliveries
It means how many times, stock is purchased during the whole year. Total annual
demand is divided by by the batch size in order to find out the number of deliveries If
batch size is 200 units then:-

Number of deliveries=25000/200
=125

Number of deliveries is taken as a whole number. For example, if 300 units are
purchased one time then:-
Number of deliveries is taken as whole number. For example, if 300 units are purchase
at one time then:-

Number of deliveries=25000/300
=83.3

In this case, number of deliveries will be taken as 84.

In order to find out delivery cost, number of deliveries is multiplied by delivery cost per
batch

(ii) Stockholding Costs

It is taken as specific percentage of the value of average stock. Average stock is taken
as one half of batch size. For example if 200 units are purchased at one time, on
average 100 units will remain in the stock. In this example, average stock will be
multiplied by Ksh 2000 in order to find out the value of average stock. The stockholding
cost will be 25% of the value of average stock.

Stock Reports
There are various stock reports which include the following
a) Stock demand reports
b) Usage Reports
c) Stock Levels Reports
d) Stock ledger reports- receipts, issues and balances
e) Stock Sales Report
f) Stock Production Report
g) Stock Purchase Report
NB: Lead time: Time taken between ordering of goods and delivery of the same.

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