Chapter-6

Supply Chain Management

Supply Chain
A supply chain is the sequence of organizations—their facilities, functions, and
activities— that are involved in producing and delivering a product or service.
The sequence begins with basic suppliers of raw materials and extends all the way
to the final customer.
Facilities include warehouses, factories, processing centers, distribution centers,
retail outlets, and offices.
Functions and activities include forecasting, purchasing, inventory management,
information management, quality assurance, scheduling, production, distribution,
delivery, and customer service.

Figure: A typical supply chain of Manufacturing organization

 Supply Chain Management
Supply chain management is the strategic coordination of all business activities
both inside a company and across its supply chain to balance supply and demand
effectively.
For example, a company like Apple manages relationships with suppliers,
manufacturers, distributors, and retailers to ensure iPhones are made, shipped, and
available to customers on time
Logistics is a key part of the supply chain focused on the movement and storage of
goods, services, cash, and information. It includes managing transportation
(inbound and outbound), warehousing, inventory, order fulfillment, and reverse
logistics (returns).
For example, logistics ensures that raw materials arrive at a factory, finished
products are stored in warehouses, and customer orders are picked, packed, and
shipped efficiently.
 Procurement
The purchasing department buys all the things a company needs to make its
products or offer its services. This includes materials, parts, tools, and services.
This is very important because a large part of the cost of making products comes
from buying these materials and parts. For example, in manufacturing, about 60%
of the total cost of finished goods is from purchased materials.
Retail and wholesale businesses rely even more on purchasing. Over 90% of their
inventory costs often come from items they buy to resell.

Purchasing interfaces
Purchasing has interfaces with a number of other functional areas, as well as with
outside suppliers. The interactions between purchasing and these other areas are
briefly summarized here.
Operations: They request materials needed for production. Close cooperation with
purchasing ensures the right quality, quantity, and delivery timing.
Example: The production team asks purchasing to buy 1,000 units of a specific
component to meet the manufacturing schedule.
Accounting: Handles payments to suppliers and must be informed quickly when
goods arrive to take advantage of discounts for early payment.
Example: Once the warehouse receives a shipment, accounting is notified to process
the invoice and pay within the discount period.
Design and Engineering: Prepare detailed material specifications that purchasing
needs to know to buy the correct items.
Example: Engineers specify the exact type of steel required for a product, and
purchasing uses this to find the right supplier.
Receiving: Inspects incoming shipments to check if they meet quality, quantity, and
delivery time requirements, then stores the goods temporarily.
Example: The receiving department counts and inspects parts from a supplier before
moving them to inventory.
Suppliers/Vendors: Work with purchasing to understand what materials are
needed and the required quality, quantity, and delivery schedules.
Example: A supplier discusses delivery timelines and product standards with
purchasing to ensure they meet the company’s needs.

Purchasing Cycle
Purchasing cycle consist with Series of steps that begin with a request for purchase
and end with notification of shipment received in satisfactory condition. The main
steps in the cycle includes followings.
1. Purchasing receives the requisition: A department in the company asks to buy
something by sending a form (called a requisition) to the purchasing team. This form
says what is needed, how much, how good it should be, when it’s needed, and who
wants it.
Example: The production team sends a requisition to purchase 500 kg of high-grade
steel to be delivered within 2 weeks.
2. Purchasing selects a supplier: The purchasing team looks for a supplier who can
provide the requested items. If there isn’t a regular supplier for that item, they
search for a new one.
Example: There’s no steel supplier currently in the company’s records, so the
purchasing manager looks online and asks for referrals to find a new one.
3. Purchasing places the order with a vendor: Once the supplier is chosen, the
purchasing team sends an order. For big purchases, they may ask different suppliers
to give price quotes (bids) and may negotiate terms before finalizing.
Example: Three steel suppliers are asked to bid. The best one is selected, and an
order is placed for 500 kg of steel at the agreed price.
4. Monitoring orders: The purchasing team keeps track of the order to make sure
it’s on schedule. If delays happen, they let the requesting department know.
Example: The supplier says there will be a delay of 3 days. The purchasing team
informs the production team so they can adjust their schedule.
5. Receiving orders: When the order arrives, the receiving team checks to make sure
the correct quantity and quality of items have been delivered. They notify relevant
departments. If there are problems, the goods might be returned or inspected
further.
Example: The steel arrives, but 50 kg is rusted. The receiving team informs
purchasing, and the rusted steel is returned to the supplier.

Centralized vs Decentralized purchasing

Centralized purchasing is when one special department or team in an organization
handles all buying activities for the entire company.
This approach consolidates orders, which often leads to lower prices because the
larger volume can secure quantity discounts. It also allows for better service and
closer relationships with suppliers since there is a single point of contact.
Centralized purchasing ensures standardized processes, consistent quality, and
tighter control over spending across the organization.
Example: A large retail chain’s headquarters manages all purchases of inventory and
supplies for all its stores, negotiating bulk discounts with suppliers and ensuring
uniform products across locations.
Decentralized purchasing means that individual departments, teams, or branches
handle their own buying needs independently.
This approach allows each unit to respond quickly to its specific local requirements
and build relationships with suppliers that best fit their specialized needs.
It offers greater flexibility and faster decision-making since approval workflows are
shorter and more localized.
However, it may lead to higher costs due to smaller order volumes and less
consolidated buying power.
Example: In a multinational company, the IT department directly purchases
software licenses while the facilities department buys office supplies. Each
department chooses suppliers and manages purchases based on their unique needs
without involving a central procurement team.

Supplier Management
1. Choosing Supplier: Before picking a supplier, a company checks their price,
product quality, reputation, past experiences, and customer service. A Vendor
Analysis helps compare and evaluate suppliers based on these factors.
Example: A clothing company wants to buy fabric. They compare three suppliers
based on cost, fabric quality, delivery speed, and how helpful they are after a sale.
They choose the one with the best overall value, not just the lowest price.
2. Supplier Audit: Regular checks on a supplier to ensure they are producing good-
quality products, meeting deadlines, and improving their processes. If issues are
found, the buyer and supplier can fix them early.
Example: A phone company visits its battery supplier every six months to check if
the batteries are made safely, delivered on time, and meet all quality standards. If
a problem is found (e.g., frequent late deliveries), they work together to fix it.
3. Supplier Certification: A detailed review of a supplier to make sure they meet the
buyer’s standards. Certified suppliers are trusted to consistently deliver quality,
making them more reliable partners.
Example: An automotive company wants to ensure its parts suppliers meet strict
safety and quality standards. They assess and certify them before doing long-term
business.
4. Supplier Relationship Management: Building a strong, cooperative relationship
with suppliers instead of treating them like just vendors. Good relationships lead to
better service, flexibility, and problem-solving.
Example: A grocery chain works closely with its vegetable suppliers. When there’s a
sudden weather problem, the supplier informs them early and works on alternate
delivery plans.
5. Supplier Partnership: Companies and suppliers work together like partners. They
share plans, data, and solve problems jointly. Fewer suppliers are used, and long-
term cooperation is the goal.
Example: A computer company and its chip supplier share forecasts and product
plans. This helps the chip supplier prepare and deliver on time, avoiding shortages.
6. Strategic Partnering: Two or more businesses join together strategically because
their products or services complement each other. This partnership helps them
grow or compete better.
Example: A smartphone company partners with a camera lens manufacturer to
create high-quality camera phones. Both benefit — better phones for one, more
sales for the other.

Supplier as adversary versus supplier as partner