SUPPLY CHAIN MANAGEMENT

Module-1

Introduction to Supply Chain Management

By
Dr. Renukananda K H

Assistant Professor
Dept. of Mechanical Engineering.
RVITM-Bangalore

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 Supply Chain Management
(18ME653)

Course content
 

Teaching Hours/Week (L:T:P): CIE Marks: 40

(3:0:0)
Credits: 03 SEE Marks:60
Exam Hours: 03 Total: 100

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 What is supply chain management ?
• The supply chain includes all activities involved in the
transformation of goods from the raw material stage to
the final stage, when the goods and services reach the
end customer.
• Supply chain management involves planning, design and
control of flow of material, information and finance
along the supply chain to deliver superior value to the
end customer in an effective and efficient manner.

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 What is supply chain management ?
• Supply Chain Management is primarily concerned with
the efficient integration of suppliers, factories,
warehouses and stores so that a product is produced and
distributed in the right quantities, to the right locations
and at the right time, and so as to minimize total system
cost subject to satisfying service requirements.
• Note:
– Who is involved
– Cost and Service Level
– It is all about integration

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 Basics of Supply Chain
• The average company spends nearly half of every
dollar that it earns on production

• In the past, companies focused primarily on

manufacturing and quality improvements to
influence their supply chains

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 Basics of Supply Chain
The supply chain has three main links:
• Materials flow from suppliers and their “upstream”
suppliers at all levels
• Transformation of materials into semi-finished and
finished products through the organization’s own
production process
• Distribution of products to customers and their
“downstream” customers at all levels

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 Basics of Supply Chain
• Organizations must embrace technologies that can
effectively manage supply chains

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Basics of Supply Chain

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 Evolution of Supply Chain
Management
• The First Revolution (1910–1920): Vertical Integrated
Firms Offering Low Variety of Products

• The Second Revolution (1960–1970): Tightly Integrated

Supply Chains Offering Wide Variety of Products

• The Third Revolution (1995–2020): Virtually Integrated

Global Supply Networks Offering Customized Products
and Services
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 The First Revolution (1910–1920): Vertical
Integrated Firms Offering Low Variety of Products

• The first major revolution was staged by the Ford Motor

Company where they had managed to build a tightly integrated
chain.
• Through its tightly integrated chain, it could manage the journey
from the iron ore mine to the finished automobile in 81 hours.
• However, as the famous saying goes, the Ford supply chain
would offer any colour, as long as it was black; and any model,
as long as it was Model T.
• Ford innovated and managed to build a highly efficient, but
inflexible supply chain that could not handle a wide product
variety and was not sustainable in the long run.
• http://www.hyperwrite.com/Articles/showarticle.aspx?id=9010
 The Second Revolution (1960–1970): Tightly Integrated
Supply Chains Offering Wide Variety of Products
• Towards the end of the first revolution, the manufacturing
industry saw many changes, including a trend towards a wide
product variety. To deal with these changes, firms had to
restructure their supply chains to be flexible and efficient.

• The supply chains were required to deal with a wider product

variety without holding too much inventory. The Toyota
Motor Company successfully addressed all these concerns,
thereby ushering in the second revolution.

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 The Third Revolution (1995–2020): Virtually Integrated
Global Supply Networks Offering Customized Products and
Services
• Dell computers allows customers to configure their own laptops
(in terms of processors, video cards, screen sizes, memory, etc.)
and track the same in their production and distribution systems.
• Apple offers personal digital devices to its customers and iPod is
a classic example. However, it is not just about the product.
Apple allows the consumer to have a personalized user
experience through the features and services. Users can
personalize the music and other media content on their device
through the various features available on iPod.
• Similarly, Bharti Airtel allows services like My Airtel through
which customer can have unique personalized experience.
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 SCM Role of Economy
• In a globalized economy, efficiency and speed of response
becomes even more critical, and supply chains become the
new competitive weapon.
• The Indian economy as a whole, and the manufacturing sector
in particular, need to improve supply chain performance
considerably if Indian firms are to compete globally.
Example:
• Cisco, the global market leader in networking equipment's like
routers and switches, had seen more than 50 per cent growth
rate in 1999 and 2000.

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 SCM Role of Economy
• A similar growth trend had been forecast for 2001.
Unfortunately, there was a downturn in the economy and Cisco
took a long time to respond to the change in the economic
environment.
• During the economic downturn, other networking companies
cut back on inventory while Cisco decided to build inventory.
• Cisco had entered into long-term commitments with its
manufacturing partners and certain key component makers.
• Cisco took sometime to recognize the downturn and by the
time Cisco started putting brakes on its supply chain, it was
quite late.
• Cisco ended up writing off inventory worth $2.2 billion. Its
stock price plunged from $83 to $13.
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 The Importance of
the Supply Chain
• In the past, customers were not very demanding and
competition was not really intense. As a result, firms
could afford to ignore issues pertaining to the supply
chain.
• Today, firms that do not manage their supply chain
will incur huge inventory costs and eventually end up
losing a lot of customers because the right products
are not available at the right place and time.

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Launched across 93
countries simultaneously
Delivering 1,75,000 lunchboxes (dabbas) across Mumbai
both on forward and reverse direction daily
8,50,000 SKUs
 Tata Motors
Winners of 2006 SCM award

• Established in 1945, Tata Motors' presence indeed cuts across the

length and breadth of India.
• Over 5.9 million Tata vehicles ply on Indian roads, since the first
rolled out in 1954.
• The company's manufacturing base in India is spread across
Jamshedpur (Jharkhand), Pune (Maharashtra), Lucknow (Uttar
Pradesh), Pantnagar (Uttarakhand) and Dharwad (Karnataka).
• Following a strategic alliance with Fiat in 2005, it has set up an
industrial joint venture with Fiat Group Automobiles at Ranjangaon
(Maharashtra) to produce both Fiat and Tata cars and Fiat
powertrains.
• The company has established a new plant at Sanand (Gujarat).
• The company's dealership, sales, services and spare parts network
comprises over 3500 touch points; Tata Motors also distributes and
markets Fiat branded cars in India.```
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 Dell Computers
• Selling computer systems directly to customers,
• Dell ships more than 110,000 systems every day
to customers in 180 countries — that’s more
than one every second.
• Partnerships with a wide variety of key industry
software, hardware and component suppliers
give us a uniquely broad perspective on the
computing landscape

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Level of Management
 Four functions of
Management

Planning
Choose goals

Controlling Organizing
Monitor and Measure Working together

Leading
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24
 History of Supply Chain
Management
• 1960’s - Inventory Management Focus, Cost Control
• 1970’s - MRP & BOM - Operations Planning
• 1980’s - MRPII, JIT - Materials Management, Logistics
• 1990’s - SCM - ERP - “Integrated” Purchasing, Financials,
Manufacturing, Order Entry
• 2000’s - Optimized “Value Network” with Real-Time
Decision Support; Synchronized & Collaborative Extended
Network

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 The Importance of
the Supply Chain
The following are the five major trends that have
emerged to make supply chain management a
critical success factor in most industries.
• Proliferation in product lines.
• Shorter product life cycles.
• Higher level of outsourcing.
• Shift in power structure in the chain.
• Globalization of manufacturing.

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 Proliferation in product lines
• More and more product variety is needed to satisfy the
growing range of customer tastes and requirements.
• We define stock-keeping unit (SKU) as a unit of variety.
For example, the same brand of soap may be offered in
varying colours and sizes.
• Companies like HUL, in their personal care products,
manage, on an average, 1,200 SKUs. With increasing
product variety, it becomes rather difficult to forecast
accurately.
• Hence, retailers and other organizations involved in the
business are forced to either maintain greater amount
of inventories or lose customers.
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 Shorter product life cycles
• With increased competition, product life cycles
across all industries are becoming shorter. For
example, technology leaders like Apple works with a
life cycle as short as 6 months.
• The term product life cycle refers to the length of
time a product is introduced to consumers into the
market until it's removed from the shelves.

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 Higher level of outsourcing.

• Firms increasingly focus on their core activities and

outsource non-core activities to other competent
players.
• Bharti Tele-Ventures, India’s number one private
telecom service provider, has outsourced network-
management services, IT services and call centre
operations.
• This trend towards outsourcing is irreversible but a
higher level of outsourcing makes supply chains more
vulnerable, thereby forcing firms to develop different
types of supply chain capabilities within the
organization. 29
 Shift in Power
Structure in the Chain
• In every industry, the entities closer to customers are
becoming more powerful. With increasing competition, a
steadily rising number of products are chasing the same retail
shelf space.
• Retail shelf space has not increased at the pace at which
product variety has increased. So there have been cases of
retailers asking for slotting allowance when manufacturers
introduce new products in the market place. here is a clear
shift in the power structure.
• Retailers have realized that they are powerful entities in the
chain and hence expect the manufacturers to be more
responsive to their needs and demands. In general,
manufacturers are forced to respond more quickly to the
customers’ demands, because of changes in the power
structure within the chain. 30
 Globalization of Manufacturing.

• Unlike in the past, when firms used to source

components, produce goods and sell them locally,
now firms are integrating their supply chain for the
entire world market.
• For example, companies like ABB have developed
some global centres of excellence for each of their
product lines that take care of the global market.
• General Motors is talking about a world car and has
been designing a few cars for global markets.

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 Globalization of Manufacturing.

• In the telecommunications and electronics industry,

companies usually get their chips from Taiwan, test
them in Europe and finally integrate them with other
products in the United States of America to sell in the
international market.
• This has made managing supply chains extremely
complicated. Unlike information and finance flow,
which can be managed electronically, materials and
products have to move physically, and as this
movement can even be across continents, managing
supply chains is now an extremely complex issue.
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 Decisions in a Supply Chain

Successful supply chain management involves several

decisions with varying time frames. We can broadly
classify them as

• Supply chain strategy or design

• Supply chain planning
• Supply chain operation

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 Design Decisions
Supply chain design (network design) or strategic
decisions involve the following critical issues:
• What activities should be carried out by the nodal
firm and what should be outsourced?
• How to select entities/partners to perform
outsourced activities and what should be the nature of
the relationship with those entities? Should the
relationship be transactional in nature or should it be a
long-term partnership?
• Decisions pertaining to the capacity and location of
the various facilities.
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 Supply Chain Strategy
or Design
• Decisions about the structure of the supply chain and what
processes each stage will perform
• Strategic supply chain decisions
• 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 previous
phase
• Starts with a forecast of demand in the coming
year

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 Supply Chain Planning

• Planning decisions:
• Which markets will be supplied from which locations
• Planned buildup of inventories
• Subcontracting, backup locations
• Inventory policies
• Timing and size of market promotions
• Must consider in planning decisions demand
uncertainty, exchange rates, competition over the
time horizon

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 Supply Chain Planning
Advanced
Scheduling
Demand
Planning
Order
Commitment
Customer
Order
Transportation
Planning
Distribution
Planning

Enterprise Architecture

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 Supply Chain Operation
• Time horizon is weekly or daily
• Decisions regarding individual customer orders
• Supply chain configuration is fixed and operating
policies are determined
• Goal is to implement the operating policies 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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 Operations Decisions
• Demand forecasting
• Procurement planning and control
• Production planning and control
• Distribution planning and control
• Inventory management
• Transportation management
• Customer order processing
• Relationship management with partners in the
chain

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 Operations as a
Transformation Process

INPUT
• Material
TRANSFORMATION OUTPUT
• Machines
• Goods
• Labor PROCESS
• Services
• Management
• Capital

Feedback

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 Supply Chain Execution
Forecasting

Aggregate
Inventory
Planning
Replenishing Process
Capacity
Planning

MPS/Sourcing

Inventory
Order
Order Fulfillment Availability
Entry and
Processing
Confirmation Planning - Schedule
Production
Inventory
Order Planning Process Availability Production Process
- Priority
Order

Production
Scheduling
Schedule
Distribution Pick and Customer
Home
Scheduling Load Service
Delivery

Distribution Process
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Value Chain

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Supply Chain Network

Figure 1.1 Supply Chain Network

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 Supply Chain Network

Plan Source Make Deliver Buy

Suppliers Manufacturers Warehouses & Customers

Distribution Centers

Transportation Transportation
Costs Transportation
Material Costs Costs
Inventory Costs Costs
Manufacturing Costs

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 Inventory at Different
Stocking Points

Raw Work in Finished

materials process goods

Supplier Manufacturing plant Distribution center Retailer

Figure 8.1
 Customer Customer Customer Customer

Manufacturing Firm
Supply-Chain for a
Distribution Distribution
center center

Manufacturer

Tier 1

Tier 2

Tier 3

Legend Supplier of services Supplier of materials

Figure 8.2
 Process View
of the Supply Chain
Supply Chain Planning

Information Flows

Product Product Product Product

Supplier Manufacturing Distribution Retailer Consumer
Flows Flows Flows Flows

Payment Flows

Supply Chain Execution

SCM is the coordination of material, information and financial flows between and among all the
participating enterprises

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 Supply Chain Management
Plan Source Make Deliver Buy

• A set of approaches used to efficiently integrate

– Suppliers
– Manufacturers
– Warehouses
– Distribution centers
• So that the product is produced and distributed
– In the right quantities
– To the right locations
– And at the right time
• System-wide costs are minimized and
• Service level requirements are satisfied

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 Why Is SCM Difficult?
Plan Source Make Deliver Buy

• Uncertainty is inherent to every supply chain

– Travel times
– Breakdowns of machines and vehicles
– Weather, natural catastrophe, war
– Local politics, labor conditions, border issues

• The complexity of the problem to globally optimize a

supply chain is significant
– Minimize internal costs
– Minimize uncertainty
– Deal with remaining uncertainty

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 Components of Supply Chain

Suppliers. Source of raw materials, component parts, semi-manufactured

products, and other items that occur early in the supply chain - unfinished or
non-consumable products.
Manufacturers. Makers of products. Suppliers produce components or
subassemblies, while manufacturers perform the task of final assembly or
product integration.
Distributors. Responsible for the storing, and handling of materials at receiving
docks, warehouses, and retail outlets.
Retailers. These are the manufacturer's customers - the stores that buy the
actual products.
Consumers. This is you - the person who actually buys the product for
consumption.
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 Supply Chain Processes

Purchasing. Activities related to the purchase of all goods and services.

Order processing. Fill customers' orders, such as order receipt, order picking,
and order shipment.
Demand planning. Forecasts, actual sales, and current inventory levels.
Inventory mgmt. Forecasting, proper positioning of stock, and the active
observation of product age and availability.
Warehousing. The holding of goods with an emphasis on moving product
into, through, and out of warehouses in a timely manner.
Transportation. Movement of products from one specific destination to
another.
Customer service. Includes all sales or after-sales related activities.
 Enablers of supply chain
performance
• For example in a country like the United States of America,
logistic costs used to account for 15 percent of gross domestic
product (GDP) in the 1980s. Today because of Innovations in
technology and management practices logistic costs account
for 8.5 per cent of GDP.
• Gross Domestic Product (GDP) is the monetary value of all
finished goods and services made within a country during a
specific period.

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 Drivers or Enablers of
Supply Chain Performance
 Facilities
– places where inventory is stored, assembled, or fabricated
– production sites and storage sites
 Inventory
– raw materials, WIP, finished goods within a supply chain
– inventory policies
 Transportation
– moving inventory from point to point in a supply chain
– combinations of transportation modes and routes
 Information
– data and analysis regarding inventory, transportation, facilities throughout the
supply chain
– potentially the biggest driver of supply chain performance
 Sourcing
– functions a firm performs and functions that are outsourced
 Pricing
– Price associated with goods and services provided by a firm to the supply chain
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 A Framework for
Structuring Drivers
Competitive Strategy

Supply Chain
Strategy
Efficiency Responsiveness
Supply chain structure

Logistical Drivers

Facilities Inventory Transportation

Information Sourcing Pricing

Cross Functional Drivers

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 Facilities

• Role in the supply chain

• the “where” of the supply chain
• manufacturing or storage (warehouses)
• Role in the competitive strategy
• economies of scale (efficiency priority)
• larger number of smaller facilities (responsiveness
priority)
• Example 3.1: Toyota and Honda
• Components of facilities decisions

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 Components of
Facilities Decisions
• Location
• centralization (efficiency) vs. decentralization
(responsiveness)
• other factors to consider (e.g., proximity to customers)
• Capacity (flexibility versus efficiency)
• Manufacturing methodology (product focused versus
process focused)
• Warehousing methodology (SKU storage, job lot
storage, cross-docking)
• Overall trade-off: Responsiveness versus efficiency

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 Inventory

• Role in the supply chain

• Role in the competitive strategy
• Components of inventory decisions

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 Inventory: Role in
the Supply Chain
• Inventory exists because of a mismatch between
supply and demand
• Source of cost and influence on responsiveness
• Impact on
• material flow time: time elapsed between when material
enters the supply chain to when it exits the supply chain
• throughput
• rate at which sales to end consumers occur
• I = DT (Little’s Law)
• I = inventory; D = throughput; T = flow time
• Example
• Inventory and throughput are “synonymous” in a supply chain
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 Inventory: Role in
Competitive Strategy
• If responsiveness is a strategic competitive priority,
a firm can locate larger amounts of inventory closer
to customers
• If cost is more important, inventory can be reduced
to make the firm more efficient
• Trade-off
• Example 3.2 – Nordstrom

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 Components of
Inventory Decisions
• Cycle inventory
• Average amount of inventory used to satisfy demand between
shipments
• Depends on lot size
• 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
• Overall trade-off: Responsiveness versus efficiency
• more inventory: greater responsiveness but greater cost
• less inventory: lower cost but lower responsiveness

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 Transportation

• Role in the supply chain

• Role in the competitive strategy
• Components of transportation decisions

63
 Transportation: Role in
the Supply Chain
• Moves the product between stages in the supply
chain
• Impact on responsiveness and efficiency
• Faster transportation allows greater
responsiveness but lower efficiency
• Also affects inventory and facilities

64
 Transportation: Role in
the Supply Chain
• If responsiveness is a strategic competitive
priority, then faster transportation modes can
provide greater responsiveness to customers
who are willing to pay for it
• Can also use slower transportation modes for
customers whose priority is price (cost)
• Can also consider both inventory and
transportation to find the right balance
• Example 3.3: Blue Nile

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 Components of
Transportation Decisions
• Mode of transportation:
• air, truck, rail, ship, pipeline, electronic
transportation
• vary in cost, speed, size of shipment, flexibility
• Route and network selection
• route: path along which a product is shipped
• network: collection of locations and routes
• In-house or outsource
• Overall trade-off: Responsiveness versus
efficiency
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 Information

• Role in the supply chain

• Role in the competitive strategy
• Components of information decisions

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 Information: Role in
the Supply Chain
• The connection between the various stages in
the supply chain – allows coordination between
stages
• Crucial to daily operation of each stage in a
supply chain – e.g., production scheduling,
inventory levels

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 Information: Role in
the Competitive Strategy
• Allows supply chain to become more efficient
and more responsive at the same time (reduces
the need for a trade-off)
• Information technology
• What information is most valuable?
• Example 3.4: Andersen Windows
• Example 3.5: Sunsweet Growers

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 Components of
Information Decisions
• Push (MRP) versus pull (demand information
transmitted quickly throughout the supply chain)
• Coordination and information sharing
• Forecasting and aggregate planning
• Enabling technologies
• EDI (Electronic Data Interchange)
• Internet
• ERP systems
• Supply Chain Management software
• Overall trade-off: Responsiveness versus efficiency
70
 Sourcing

• Role in the supply chain

• Role in the competitive strategy
• Components of sourcing decisions

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Sourcing: Role in
the Supply Chain
• Set of business processes required to purchase
goods and services in a supply chain
• Supplier selection, single vs. multiple suppliers,
contract negotiation

72
Sourcing:
Role in the Competitive Strategy
• Sourcing decisions are crucial because they affect
the level of efficiency and responsiveness in a
supply chain
• In-house vs. outsource decisions- improving
efficiency and responsiveness
• Example 3.6: Cisco

73
Components of Sourcing
Decisions
• In-house versus outsource decisions
• Supplier evaluation and selection
• Procurement process
• Overall trade-off: Increase the supply chain profits

74
Pricing
• Role in the supply chain
• Role in the competitive strategy
• Components of pricing decisions

75
Pricing: Role in
the Supply Chain
• Pricing determines the amount to charge
customers in a supply chain
• Pricing strategies can be used to match demand
and supply

76
Sourcing:
Role in the Competitive Strategy
• Firms can utilize optimal pricing strategies to
improve efficiency and responsiveness
• Low price and low product availability; vary prices
by response times
• Example 3.7: Amazon.com

77
Components of Pricing Decisions
• Pricing and economies of scale
• Everyday low pricing versus high-low pricing
• Fixed price versus menu pricing
• Overall trade-off: Increase the firm profits

78
Obstacles to Achieving
Strategic Fit
• Increasing variety of products
• Decreasing product life cycles
• Increasingly demanding customers
• Fragmentation of supply chain ownership
• Globalization
• Difficulty executing new strategies

79
 Summary
• What are the major drivers of supply chain
performance?
• What is the role of each driver in creating strategic fit
between supply chain strategy and competitive
strategy (or between implied demand uncertainty and
supply chain responsiveness)?
• What are the major obstacles to achieving strategic
fit?
• In the remainder of the course, we will learn how to
make decisions with respect to these drivers in order
to achieve strategic fit and surmount these obstacles
80
 Drivers or Enablers of
Supply Chain Performance

• Improvement in communication and IT

• Entry of third-party logistic providers
• Enhanced inter-firm coordination capabilities

81
 Improvement in
Communication and IT
• Computing power has become inexpensive and
communication costs too have come down.
• This has helped firms in coordinating global supply
chains in a cost-effective manner. Advances in enterprise
resource planning (ERP) systems have helped firms in
automating several business processes resulting in
seamless information flow throughout the company
across different functions.
• The way ERP systems have changed the nature of
information flow within organization, Internet
technology is likely to change the nature of information
flow in interfirm transactions
82
 Enterprise Resource
Planning (ERP)
• ERP stands for "Enterprise Resource Planning" and refers to software and
systems used to plan and manage all the core supply chain,
manufacturing, services, financial and other processes of an organization.

• Enterprise Resource Planning software can be used to automate and

simplify individual activities across a business or organization, such as
accounting and procurement, project management, customer relationship
management, risk management, compliance and supply chain operations. 

83
 Entry of Third-Party
Logistic Providers
• Traditionally, many firms have been managing their
logistics activities internally.
• Lately, companies have realized that they need to focus
their energies on managing core business activities and
hence have been exploring the possibility of outsourcing
logistics activities to third-party logistics (3PL) service
providers.
• In developed countries, almost 90 per cent of the
logistics activities are outsourced and are managed by
3PL companies.
84
 Enhanced inter-firm
Coordination Capabilities
• Successful coordination across a global network of
companies has been a comparatively new
phenomenon in the corporate world. It has been
realized that for a network to function meaningfully
one needs a firm to play the role of the strategic
center.
• Many companies, like Apple, Nike, Benetton, Nintendo,
Sun and Toyota, have successfully managed complex
networks, played the part of the strategic center and,
hence, have emerged as role models to other
companies.
85
 Supply Chain
Performance in India
• Supply Chain Performance can be measured in terms
of inventory turnover ratio at the organizational level
and logistics costs at the economy level.
• Logistics costs include inventory-carrying costs,
transportation costs and logistics administration
costs.
• The Inventory turnover is a measure of the number
of times inventory is sold or used in a time period
such as a year. It is calculated to see if a business has
an excessive inventory in comparison to its sales
level.
86
 Supply Chain
Performance in India
• The equation for inventory turnover equals the cost
of goods sold divided by the average inventory.
• In a general business sense, logistics is the
management of the flow of things between the point
of origin and the point of consumption to meet the
requirements of customers or corporations.
• The resources managed in logistics may include
tangible goods such as materials, equipment, and
supplies, as well as food and other consumable
items.

87
Ratio of Logistic
Cost with GDP

88
Performance of Indian
Manufacturing Industry

89
Sector-wise Inventory
performance of India

90
 Challenges in Maintaining a
Supply Chain in India

• Taxation Structure Drives Location Decisions

• Poor State of Logistics Infrastructure

91
 Taxation Structure
Drives Location Decisions
• In India, most decisions pertaining to facility location have
been driven by taxation considerations and not by customer
service issues.
• For example, almost all pharmaceutical manufacturers have
located their facilities at Baddi in Himachal Pradesh not
because of either market access or resource access, but
because Baddi offers taxation benefits.
• Similarly, air conditioners and diesel power generators are
manufactured in Silvasa. Special economic zones offer taxation
benefits, and many firms have altered their plant location
decisions, driven by these considerations.
• Though taxation issues cannot be ignored, given the fact that
India has poor road infrastructure.

92
 Poor State of Logistics
Infrastructure
• Both the transportation and the warehousing industry are
in the unorganized sector. About 90 per cent of the trucks
in the country belong to owners who have less than five
trucks.

• An unorganized trucking industry, such as this, results in

unreliable lead times and high in-transit damages. With lots
of old trucks on the road, breakdowns are quite frequent,
further adding to unreliability.

• Modernizing warehouse management is an idea that is yet

to see the light of the day in India.
93
 Supply Chain Strategies
• A firm’s supply chain strategy should ensure that its supply
chain provides superior value to the end customer in an
efficient manner. Value offering (bundling of goods and
services) to a customer should be available at a reasonable
price.
• In almost all product categories, customers want more
variety and quicker services at lower prices. Firms must
recognize the nature of trade-offs between customer service
and costs and arrive at an optimal decision on this front.
• If various processes and decisions within the chain are not
aligned to suit a company’s business strategy, it obviously
cannot remain competitive in the long run.
94
 Customer Service
and Cost Trade-offs
• A firm must ensure a smooth fit between its
business strategy and supply chain strategy.
• As a part of its business strategy, the firm decides
the market segment in which it wants to operate
and the level of customer service it wants to offer.
• The supply chain strategy includes issues of cost
that the firm has to incur to provide the targeted
level of customer service.

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Supply Chain Trade-offs

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 Four Dimensions of
Customer Service
• Order delivery lead time
• Responsiveness
• Delivery reliability
• Product variety

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 Order Delivery Lead Time

Order delivery time is the time taken by the supply

chain to complete all the activities from order to
delivery

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 Critical Characteristic
of the Supply Chain
• A critical characteristic of the supply chain is the
customer order penetration point or decoupling
point.
• There are essentially three types of supply chains
characterized by the customer order penetration
point:
• Make to Stock (MTS),
• Make to Order (MTO) and
• Configure to Order (CTO).

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 Order Penetration Point
Based Supply Chain Typology
Conceptual representation of these three types of
supply chains.

• If customers expect their order (an order can either be a formal document or even
an informal instruction, e.g., a customer asking a retailer for a tooth paste is an
order) to be fulfilled instantaneously, then the supply chain is in the MTS business.
• If the supplier gives enough time to the firm to assemble the product before
delivery, it is in the CTO business.
• If the customer gives enough time to the manufacturer to carry out the complete
set of operations (source, make, assemble and deliver) after placing the order, it is
in the MTO business. 100
 Responsiveness

• Responsiveness captures the firm’s ability to handle

the uncertainty of market demand.
• In addition to delivery lead time, supply chains have
also been characterized on the basis of the nature of
demand uncertainty faced by products in the market
place.
• Based on the nature of demand uncertainty,
products can be classified as functional products or
innovative products.

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 Delivery reliability

• As discussed in the earlier section, delivery lead

time is an important dimension of customer
service, and delivery reliability essentially
captures the degree to which a firm is able to
service its customers within the promised
delivery time.
• Delivery reliability measures the fraction of
customer demand that is satisfied within the
promised delivery lead time.

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 Product variety

• The quantum of variety offered by a firm is an

important dimension of customer service. In the past
couple of years, a “variety explosion” has taken
place in most product categories.
• Higher product variety offers greater choices to the
customer who is likely to get a product that fits
closest to his or her actual requirements.
• Some firms like Dell Computers and National
Panasonic go to the extent of allowing their
customers to design their own products

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 Supply Chain
Performance Measure
• The Supply-Chain Council is an independent, non-profit, global
corporation interested in getting the industry to standardize supply
chain terms so that meaningful supply chain benchmarking can be
carried out.
• It has developed the Supply Chain Operations Reference (SCOR)
model as the industry standard for supply chain management.
• Several supply chain software vendors have adopted the SCOR
performance measures in their performance management module.
• SCOR recognizes six major processes: Plan, Source, Make, Delivery,
Return, and Enable.

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 Supply Chain Operations
Reference Model (SCOR) Model
As per the SCOR model, supply chain performance
measures fall under the following five broad
categories:

• Cost
• Assets (Asset Management Efficiency)
• Reliability
• Responsiveness
• Agility
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 SCOR Model
Supply Chain Metrics

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108
 Bench Marking Supply Chain
Performance Using Financial Data
 Total length of the chain. The total length of the chain is
arrived at by adding up the days of inventory for raw
materials, work in progress and finished goods. The firm
that has the minimum total length of the chain is said to
have the best performance.
 Supply chain inefficiency ratio. This ratio measures the
relative efficiency of internal supply chain management.
The ratio will be low for the firms with better performance.
 Supply chain working capital productivity. The analysis of
firms on this metric will also be based on the levels of
inventory, accounts receivable and accounts payable. Firms
with efficient supply chains will usually have high supply
chain working capital productivity.
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 Calculating the Length
of Various Stages of the Chain
• The following formulae (terms defined in Table 2.2)
are used to calculate the length of the various stages
in the supply chain:
• DRM, DWIP, DFG = Days of raw material, work in
process and finished goods, respectively
DRM = RM × 365/CRM,

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• DWIP = SFG × 365/CP,
• DFG = FG × 365/CS
• Total length of chain in days = DRM + DWIP + DFG
• The duration of time taken by the material flow is
captured by this measure. Firms like
• Dell Computers perform very well on this dimension.

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 Evaluating the Efficiency
of Supply Chain Management
• The internal supply chain inefficiency ratio is a measure
of the efficiency of internal supply chain management. To
calculate this ratio, we consider total inventory carrying
costs and the distribution costs to be components of the
internal supply chain management costs. We calculate
the internal supply chain inefficiency ratio as follows:
SCC = DC + INV × ICC
and SCI = SCC/NS
where
• SCC is the supply chain management costs,
• ICC is the inventory carrying cost and
• SCI is the supply chain inefficiency ratio 113
 Supply Chain
Working Capital Productivity
• The supply chain working capital productivity is
calculated using the following formula:
SWC = INV + AR − AP

• where SWC is the supply chain working capital.

SWCP = NS/SWC

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Thank you

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