SUPPLY CHAIN MANAGEMENT AND LOGISTICS

CHAPTER IX

SUPPLY CHAIN MANAGEMENT AND LOGISTICS

OVERVIEW OF THE CLASS MODULE

Supply chain management is the management of all activities that facilitate the fulfillment of a
customer order for a manufactured good to achieve customer satisfaction at reasonable cost. To stay
competitive “retailers need to know where things are at all times so they can redirect shipments,
rebalance inventories and respond to new demands on the fly.”

Managing supply chain requires numerous operational activities, including working closely with
suppliers, purchasing, and transportation, inventory management, managing risks that may disrupt the
supply chain, measuring supply chain performance, and ensuring sustainability.

LEARNING OBJECTIVES

By the end of this module, the students should be able to:

1. Explain the basic concepts of supply chain management;

2. Describe activities associated with logistics;
3. Describe types of risk supply chains face and ways to mitigate them;
4. List and describe the important metrics used to measure supply chain performance; and
5. Evaluate sustainability in supply chains.

LEARNING
CONTEXT
MANAGING SUPPLY CHAINS

Logistics is the management of transportation activities and the flow of materials within a supply
chain to ensure adequate customer service at reasonable cost. The logistics function is responsible for
selecting transportation carriers; managing company-owned fleets of vehicles, distribution centers, and
warehouses; controlling efficient interplant movement of materials and goods within the supply chain;
and ensuring that goods are delivered to customers.

 The SCOR Model

The Supply Chain Operations Reference (SCOR) Model is a framework for understanding
the scope of supply chain management that is based on the five basic functions involved in
managing a supply chain which are also the key processes that create value to the customer:

1. Plan – developing a strategy that balances resources with requirements and establishes
and communicates plans for the entire supply chain. This includes management policies
and aligning the supply chain plan with financial plans.

2. Source – procuring goods and services to meet planned or actual demand. This includes
identifying and selecting suppliers, scheduling deliveries, authorizing payments, and
managing inventories.

3. Make – transforming goods and services to a finished state to meet demand. This includes
production scheduling, managing work-in-process, manufacturing, testing, packaging, and
product release.

4. Deliver – managing orders, transportation, and distribution to provide the goods and
services. This entails all order management activities from processing customer orders to
routing shipments, managing goods at distribution centers and invoicing the customer.

5. Return – processing customer returns; providing maintenance, repair, and overhaul; and
dealing with excess goods. This includes return authorization, receiving, verification,
disposition, and replacement and credit.

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 Sourcing and Purchasing

Suppliers are vital to supply chains, because they provide the materials and components
needed for production to ultimately meet customer demand. If these are not delivered on time, in
the proper quantity, and with the right level of quality, the entire supply chain could break down.

For manufacturing, one of the first questions that supply chain managers must ask is where to
obtain (“source”) raw materials, manufactured components, and subassemblies. For services,
sourcing options might include employment agencies, equipment maintenance and repair
companies, information systems providers, third-party logistic firms, engineering services, health
care services, and retirement providers.

Purchasing is the function responsible for acquiring raw materials, component parts, tools,
services, and other items required from external suppliers. The principal goal of purchasing is to
support its key internal customers. Thus, purchasing must do much more than simply buy
according to the quoted line-item purchase prices.

 Managing Supplier Relationships

Three principles for working with suppliers are:

1. Recognizing their strategic importance in accomplishing business objectives such as minimizing

the total cost of ownership.
2. Developing a win-win relationship through long-term partnerships rather than as adversaries.

3. Establishing trust through openness and honesty, and therefore, leading to mutual advantages.

 Supply and relationships

When close Value Chain Integration
are developed, the total number of suppliers can be reduced, because there is no need
for competition among suppliers for the same products. With larger contracts, suppliers benefit from economies
of scale and customers benefit from volume discounts. Suppliers’ involvement in early product design stages
often allow customers to find out about new materials, parts, and technologies before their competitors.
Moreover, with long-term contracts, suppliers are more willing to invest in process and system improvements.
Many customer even provide assistance in making such improvements. In return, they receive better products
and service.

Supply chain integration is the process of coordinating the physical flow of

materials to ensure that the right parts are available at various stages of the supply
chain, such as manufacturing and assembly parts. Value chain integration is the
process of managing information, physical goods and services to ensure their availability
at the right place, at the right time, at the right cost, at the right quantity, and with the
highest intention to quality.

LOGISTICS

Logistics manager have the three primary responsibilities:

1. Purchasing transportation services

- Selecting appropriate modes of shipment and mix of specific carriers

- Contracting with suppliers for domestic and global transportation services
- Negotiating transportation rates, and shipping, assurance, and liability contracts
- Managing international trade agreements, custom laws, and import/export fees
- Using business analytics to evaluate different shipping options

2. Managing the transportation of materials and goods through the supply chain

- Tracing shipments in transit and expedite them when necessary

- Coordinating shipments with airports, rail yards, and seaport docks.
- Issuing and auditing freight bills

3. Managing inventories

- Managing the flow of goods through warehouses, and sometimes, shipping directly to retail
stores and customers
- Filing claims for damaged goods

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 Transportation

The selection of transportation services is a complex decision, as varied services are

available:

1. Rail – this transport provides a good balance between costs, delivery speed, tonnage capacity,
and environmental sustainability.

2. Trucks – these are the most flexible of all transportation modes with the capability for door-to-
door pickup and delivery. Backhaul is when a truck delivers its load and also carries freight on
the return journey.

3. Air shipments – have the highest transportation costs, are very fast for long distances, but are
limited in how much weight they can carry.

4. Ships and barges – these are generally limited to transporting large quantities of bulky items
—historically, raw materials such as coal and iron, but recently, items such as furniture and
other manufactured products from overseas.

5. Pipelines – carry water, petroleum, natural gas, and sometimes a slurry of minerals or
commodities. These have limited use and accessibility and are used primarily for such products
as oil and natural gas.

Domestically, most consumer items are shipped via rail, trucks, and air. The critical factors in
selecting a transportation mode are:

- Speed
- Accessibility
- Cost
- Capability

 Inventory Management

Inventories support the supply chain by providing materials and goods where and when they
are needed—at every stage of the supply chain—for production to customers. Inventories provide
buffers between production operations to help keep machines and operations running. Inventories
also protect against disruptions in supply and sudden, unpredictable, surges in demand.

Vendor-managed inventory (VMI) is where the vendor (supplier) monitors and manages
inventory for customer. It is essentially outsources the inventory management function inn supply
chains to suppliers. For example, a supplier such as a consumer goods manufacturer might manage
the inventory for a grocery store.

- VMI allows the vendor to view inventory needs from customer’s perspective and use this
information to optimize its own production operations, better control inventory and capacity,
and reduce total supply chain cost.
- VMI allows vendors to make production decisions using downstream customer demand data

The performance of a supply chain often suffers from a phenomenon known as the bullwhip
effect, inn which inventories exhibit wild swings up and down. This has been observed across most
industries and increases cost and reduces service to customers. The bullwhip effect result from
order amplification in the supply chain. Order amplification is a phenomenon that occurs when
each member of a supply chain “orders up” to buffer its own inventory.

RISK MANAGEMENT IN SUPPLY CHAINS

Companies
Risk face a multitude of Management
risks inn managing supply chains. Risks in domestic
involvessupply chains are often identifying
minimal; however, risks in global supply chains are much greater. These include production problems with
suppliers that result in material shortages, labor strikes, and unexpected transportation delays, delays from
customs inspection or port operations, political instability in foreign countries, natural disasters, and even
terrorism. Good supply chain managers must anticipate and mitigate these risks to ensure that the supply chain
will be able to create and deliver its goods and services worldwide. Should they occur, they must take action to
deal with the consequences and get the supply chain up and running again.

customers, and identifying steps to mitigate the risk.

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MEASURING SUPPLY CHAIN PERFORMANCE

Supply chain managers use numerous metrics to evaluate performance and identify
improvements to the design and operation of their supply chains. Business analytics is used to create a
visual dashboard for supply chain managers to gain insights into the relationships between those
metrics.

Supply chain metrics typically balance customer requirements as well as internal supply chain
efficiencies, and fall into several categories as follows:

 Delivery reliability – it is often measured by perfect order fulfillment. A “perfect order”’ is

defined as one that is delivered meeting all customer requirements such as delivery date,
condition of goods, accuracy of items, and correct invoice.

 Responsiveness – it is often measured by the order fulfillment lead time or by perfect

delivery fulfillment. Customers today expect rapid fulfillment of orders and having
promised delivery dates met.

 Customer-related measures – it is focused on the ability of the supply chain to meet

customer wants and needs. Customer satisfaction is often measured by variety of
attributes on a perception scale that might range from “Extremely Dissatisfied” to
“Extremely Satisfied.”

 Supply chain efficiency measures – include average inventory value and inventory
turnover. Average inventory value tells managers how much of the firm’s assets are tied
up in inventory.

 Sustainability measures – show how supply chain performance affects the environment.
These might include recycle versus original product manufacturing costs, water discharge
quality, carbon dioxide emissions, and energy reductions.

 Financial measures – show how supply chain performance affects the bottom line. These
might include total supply chain costs, costs of processing returns and warranties, and the
cash-to-cash conversation cycle.

SUSTAINABILITY IN SUPPLY CHAINS

In the past, supply chain performance was focused on cost, time, and quality performance.
Today, sustainability is one of the key goals of supply chains. A large amount of harmful emissions and
pollutants emanate from the supply chain. Research has suggested that upward of 60 to 70 percent of
a company’s carbon footprint is found along their supply chain. Therefore, part of a supply chain
manager’s job today is measure, monitor, and constantly try to improve environmental performance.

 Green Sustainable Supply Chains

A green sustainable supply chains is one that uses environmentally friendly inputs and
transforms these inputs through change agents—whose by products can improve or be recycled
within the existing environment. This results in outputs that can be reclaimed and reused at the
end of their life cycle, thus creating a sustainable supply chain.

Something as simple as reducing the amount of cardboard or filler by designing “smart

packages” can save companies money and reduce landfill waste and energy usage.

 Manufactured Goods Recovery and Reverse Logistics

Many companies are developing options to recover manufactured goods that may be
discarded or otherwise unusable. This is often called manufactured goods recovery, and
consists of one or more of the following:

 Reuse or resell the equipment and its various component parts directly to customers once
the original manufactured goods is discarded.
 Repair a manufactured good by replacing broken parts so it operates as required.
 Refurbish a manufactured good by updating its look and/or components.

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 Remanufacture a good by completely disassembling it and repairing or replacing worn-out
or obsolete components and modules.
 Cannibalize parts for use and repair of other equipment of the same kind, such as
automobiles, locomotives, and airplanes.
 Recycle goods by disassembling them and selling the parts or scrap materials to other
suppliers.
 Incineration or landfill disposal of goods that are not economical to repair, refurbish,
remanufacture, or recycle.

Reverse logistics refers to managing the flow of finished goods, materials, or components
that may be unusable or discarded through the supply chain from customers toward either
suppliers, distributors, or manufacturers for the purpose of reuse, resale, or disposal. Reverse
logistics includes the following activities:

 Logistics: authorizing returns, receiving, sorting, testing, refurbishing, cannibalizing,

repairing, remanufacturing, recycling, restocking, reshipping, and disposing of materials.
 Marketing/Sales: remarketing and selling the recovered good for reuse or resale to
wholesalers and retailers.
 Accounting/Finance: approving warranty repairs, tracking reverse logistic revenue and costs,
billing, and paying appropriate suppliers and third-party vendors.
 Call Center Service: managing service center calls all along the supply chains to coordinate
work activities such as collecting items from many diverse sources for recovery
operations.
 Legal/Regulatory Compliance: constantly monitoring compliance with local, state, federal,
and country laws, import and export regulations including environmental, and service
contract commitments.

SOURCES

 Collier, D.A. et.al (2020). Operations Management and Total Quality Management. Chicago
Business Press. Philippine Edition. Cengage Learning Asia Pte Ltd.

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