Chapter-1

Content of unit -1
Introduction

Evolution

Decisions

Importance

Customer service & cost trade off

Sc’s Responsiveness

Delivery reliability

SC performance measures

Drivers of SC performance
Definition
SCM is also called the art of management of providing the
Right Product, At the Right Time, Right Place and at the
Right Cost to the Customer.
Supply chain management
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,
● Flow of information
● Flow of finance along the supply chain to deliver superior value to
the end customer in an effective and efficient manner.
Supply chain N/W
Evolution of SCM
There have been three major revolutions in the field of supply chain
management.

✔ The First Revolution(1910-1920): The Ford Supply Chain

✔ The Second Revolution(1960-1970): The Toyota Supply Chain

✔ The Third Revolution(1995-2000): The Dell Supply Chain

The First Revolution(1910-1920): The Ford Supply
Chain
Tight integrated chain.

FORD manage the journey from the iron ore mine to the finished automobile in 81 hours.

Famous saying about FORD’s SC:

The Ford supply chain would offer any colour, as long as it was black;

& 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.

General Motors, on the other hand, understood the demands of the market place and

offered a wider variety in terms of automobile models and colours.

The Second Revolution(1960-1970): The Toyota
Supply Chain

Allowed the final assembly and manufacturing of key

components to be done in-house.
The bulk of the components was sourced from a large number of
suppliers who were part of the Keiretsu system.
Keiretsu refers to a set of companies with interlocking business
relationships and shareholdings.
Long-term relationships with all the suppliers.
The Third Revolution(1995-2000): The Dell Supply
Chain

Customization
Dell did not believe in long-term relationships with suppliers.
Working with world-class suppliers with technology and cost
leadership.
Medium-term relationships with suppliers.
At Dell, the trigger for supplier orders was the actual orders by
customers, and not forecasts.
This helped Dell in reducing the inventory significantly, allowing
them to respond to any changes in the market place.
Decisions in a SC
Classified into:
✔ Design decisions
✔ Operations decisions.
 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.
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.
Operating decisions
Both tactical and operations decisions involve the following
areas:
✔ 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
Importance of Supply Chain
Proliferation in product lines
Shorter product life cycle
Higher level of outsourcing
Shift in power structure in the chain
Globalization of manufacturing
Enablers of Supply Chain Performance

Improvement in Communication and IT

Entry of Third-party Logistics Providers
Enhanced Inter-firm Coordination Capabilities
Supply Chain Performance in India

Challenging Factors are

inventory management and low cost logistics
economic environment
taxation structure and also
the geography of India
Supply Chain Challenges for the Indian
FMCG Sector
Managing Availability in the Complex Distribution Set up
Working with Smaller Pack Sizes
Entry of National Players in the Traditional Fresh Products Sector
–ITC-atta, Nestle-Yoghurt
Dealing with a Complex Taxation Structure – Pharma industry in
himasal pradesh, aircondioners in Silvasa
Dealing with Counterfeit Goods-vicks vaporub (54%)
Opportunistic Games Played by the Distribution Channel
Infrastructure-ice cream
Emergence of Third-party Logistics Provider
Emergence of Modern Retail Chains
Reservation for Small-scale Sector
Examples:
1.6 million retailers- < 2% represent organised retailers
95% of retailers – grocery stores ( < 300 square meters)
35 million consumer packs per month sold to 1000 distributors
Bought by 18 million Indian households
Harry Potter the final book in series of novels
Released in 93 countries
Penguin India, distributor of books in India
Delivered it to 300 destinations
Customer services and cost trade-offs

A firm must ensure a smooth fit between its business

strategy and supply chain strategy
Well managed firms identify and develop external
market opportunities and internal supply chain
capabilities
Cont’d
To determine the revenue and contribution potential of
increased customer service, company will need to conduct
market research.
Cont’d
From a supply chain perspective, customer service
consists of the following four dimensions:
Order delivery lead time
Responsiveness
Delivery reliability
Product variety
Supply Chain Typology

Order Penetration Point/ Decoupling Point

◦ Make to Stock
◦ Make to Order
◦ Configure to Order
Supply Chain Focus
◦ Efficiency
◦ Responsiveness
Order delivery lead time
Order delivery time is the time taken by the supply
chain to complete all the activities from order to delivery.
Cont’d
A critical characteristic of the supply chain is the
customer order penetration point or decoupling point.
Three types characterised by customer order penetration
point.
Push-pull boundary of supply chain
Order delivery lead time also can be used for drawing a
push-pull boundary of the supply chain.
All the process in SC are divided into two categories
with respect to customer order point.
Types of Supply Chains

Responsive Supply Chains: respond quickly as new

products are introduced and as demand changes.

Efficient Supply Chains: focus on operating

efficiently to minimize costs.
 Types of Supply Chains -- Continued

Exhibit 5.5:
Responsive vs. Efficient Supply Chains
Responsive Supply chain for Efficient Supply chains for
innovative product functional products
•Closely integrated in production planning •Use traditional criteria for evaluating
and control, quality management, service, suppliers.
after-sales support. •Place high value on integrity, commitment,
•Track work-in-process and finished goods reliability, and consistency.
inventory. •Value suppliers for ability to provide cost
•Share more information. savings, reduce downtime, and reduce
•Use system wide measures of inventory.
end-use-customer satisfaction.
•Suppliers are evaluated based on product
development time, geographic proximity,
lead time, and cycle time.
 Functional Versus Innovative Products:
Differences in Demand
Aspects of demand Functional (predictable Innovative (Unpredictable
Demand) Demand)

Product Life cycle More than 2 years 3 months to 1 year

Contribution margin ( % of 5% to 20% 20% to 60%
sales price)

Product variety Low ( 10 to 20 variants per High ( often thousands of

category) variants per category)

Likely forecast error 5% to 20% 40% to 100%

Average stock-out rate 1% to 2% 10% to 40%
End-of-season mark 0% 10% to 30%
markdown
Achieving Strategic Fit: Wishes vs. Capabilities

Responsive
(high cost)
supply chain Gourmet
dinner
<High margin>
o f t
Responsivenes n e Fi
spectrum Zo egic
t rat
S

Lunch buffet
Efficient <Low margin>
(low cost)
supply chain
Certain Implied Uncertain
demand uncertainty demand
spectrum
Physically Efficient vs. Market-Responsive Supply
Chain
Market-Responsive Process
Primary purpose Respond quickly to unpredictable demand to
minimize stockouts, forced markdowns, and
obsolete inventory

Manufacturing focus Deploy excess buffer capacity for flexibility

Inventory strategy Deploy significant buffer stock of all stock items

Lead-time focus Invest in ways to reduce lead time

Approach to choosing Select primarily for speed, flexibility, and quality

suppliers
Product-design strategy Use modular design to postpone product
differentiation
Delivery reliability- safe express
Identified 88 gateways and 44 hubs to ensure time
definite service all over India

Product Variety-99 colour campaign by TVS Motors

Stocks unpainted panels at the retail outlet.
Sent to Asian paints dealers
Within 48 hours, delivery is assured
 Supply Chain Performance Measures:
SCOR Model
(Supply chain operations reference)
• Internal Facing
– Cost
• Total logistics management cost, Value-added
productivity , Warranty cost
– Assets
• Cash-to-cash cycle time, Inventory days of supply, Asset
turns
• Customer facing
– Reliability
• Order fulfilment performance ,Perfect order fulfilment
– Flexibility
• Supply-chain response time, Production flexibility
 Superior Performers Spend Less on
Supply-Chain Management
Best-in-class companies have an advantage in total supply-chain
management cost (5% – 6% less in revenue)
Total Supply-Chain Management Cost

Source: Supply-Chain Council

 Comparative Performance:
Best-in-Class Versus Median
Consumer Packaged Goods Focus
Delivery Performance to Request Total Supply-Chain Management
Cost

Upside Production Flexibility Cash-to-cash Cycle time

Source: Supply-Chain Council

Evaluation of Supply Chain Performance in
Competitive Environments
Supply chain scorecard v. 3.0 Performance versus competitive
population
Overview SCOR level 1 metrics Actual Parity Advantage Superior
metrics Delivery performance to 50% 85% 90% 95%
commit date
Supply chain Fill rates 63% 94% 96% 98%
reliability
Perfect order fulfillment (on 0% 80% 85% 90%
time in full)
External
Order fulfillment lead times 7 days 7 days 5 days 3 days
(cust. to customer)
Flexibility and
responsiveness Production flexibility 45 days 30 days 25 days 20 days

Total logistics management 19% 13% 8% 3%

Cost costs
Warranty cost, returns and NA NA NA NA
Internal allowances
Value added per employee 122 k 156k 306k 460k
productivity
Inventory days of supply 119 days 55 days 38 days 22 days
Assets
Cash-to-cash cycle time 96 days 80 days 46 days 28 days

Net asset turns (working 2.2 turns 8 turns 12 turns 19 turns

capital)
The Four Drivers of Supply Chain Performance
Driver 1: Inventory Requirements

Inventory "stockage" exists in all supply chains because of a

mismatch between supply and demand

Inventory plays a significant role in a supply chain's ability to

support a firm's competitive strategy

A supply chain manager must make routine decisions to

create a more responsive and more efficient supply chain
Driver 2: Transportation

Transportation moves the product between different locations in a

supply chain

Transportation is prominent in a company's competitive strategy

The fundamental trade-off for transportation is cost (efficiency)

versus speed (responsiveness)
Driver 3: Facilities

Facilities include all locations in the

supply chain to store, assemble, or
fabricate inventory

Decisions regarding location, capacity,

and flexibility of facilities significantly
affect supply chain performance

In DoD, depot and field repair facilities

are cornerstones of the supply chain
Driver 4: Information

Information serves as the connection between the supply chain's

various stages

Information and information systems are an important part of

balancing responsiveness versus efficiency

Businesses must trade-off between efficiency and responsiveness when

trying to include more supply chain information
Supply Chain Drivers and
Obstacles
Drivers of Supply Chain Performance

How to achieve
Efficiency Responsiveness

Supply chain structure

Transportatio Logistical
Inventory Facilities Drivers
n

Cross-
Information Sourcing Pricing Functional
Drivers
 Inventory
Inventory plays a significant role in a supply chain's ability to support a
firm's competitive strategy. If a firm's competitive strategy requires a very
high level of responsiveness, a company can achieve this responsiveness by
locating large amounts of inventory close to the customer.
The trade-off implicit in the inventory driver is between the responsiveness
that results from more inventory and the efficiency that results from less
inventory.
Components-Cycle inventory is the average amount of inventory used to
satisfy demand between receipts of supplier shipments.
Safety inventory is inventory held in case demand exceeds expectation; it
is held to counter uncertainty.
Seasonal inventory is built up to counter predictable variability in
demand.
 Inventory Metrics
Average inventory measures the average amount of inventory carried. Average inventory
should be measured in units, days of demand, and financial value.
Products with more than a specified number of days of inventory identifies the products for
which the firm is carrying a high level of inventory.
Average replenishment batch size measures the average amount in each replenishment order.
The batch size should be measured by SKU in terms of both units and days of demand
Average safety inventory measures the average amount of inventory on hand
when a replenishment order arrives.
Seasonal inventory measures the amount of both cycle and safety inventory that is purchased
solely due to seasonal changes in demand.
Fill rate measures the fraction of orders/demand that were met on time from
inventory.
Fraction of time out of stock measures the fraction of time that a particular SKU had zero
inventory. This fraction can be used to estimate the demand during the stock out period.
 Transportation
Transportation moves product between different stages in a supply
chain.
The role of transportation in a company's competitive strategy
figures prominently in the company's consideration of the target
customer's needs.
If a firm's competitive strategy targets a customer who demands a
very high level of responsiveness, and that customer is willing to
pay for this responsiveness, then a firm can use transportation as one
driver for making the supply chain more responsive.
Components: Design of Transportation Network
Choice of Transportation Mode
 Transportation Metrics
Average inbound transportation cost typically measures the cost of bringing
product into a facility as a percentage of sales or cost of goods sold (COGS).
Average incoming shipment size measures the average number of units or rupees
in each incoming shipment at a facility.
Average inbound transportation cost per shipment measures the average
transportation cost of each incoming delivery.
Average outbound transportation cost measures the cost of sending product out of
a facility to the customer.
Average outbound shipment size measures the average number of units or rupees
on each outbound shipment at a facility.
Average outbound transportation cost per shipment measures the average
transportation cost of each outgoing delivery.
Fraction transported by mode measures the fraction of transportation (in units or
rupees) using each mode of transportation.
 Information
Role in the supply chain
◦ The connection between the various stages in the supply chain
◦ Crucial to daily operation of each stage in a supply chain
● E.g., production scheduling, inventory levels
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)
◦ Components-Push Versus Pull, Coordination and Information Sharing
◦ Example:
● Andersen Windows
● Wood window manufacturer, whose customers can choose from a library
of 50,000 designs or create their own. Customer orders automatically sent
to the factory
 Information Metrics
Forecast horizon identifies how far in advance of the actual event a
forecast is made.
Frequency of update identifies how frequently each forecast is
updated
Forecast error measures the difference between the forecast and
actual demand.
Seasonal factors measure the extent to which the average demand
in a season is above or below the average in the year.
Variance from plan identifies the difference between the planned
production/inventories and the actual values.
Ratio of demand variability to order variability measures the
standard deviation of incoming demand and supply orders placed.
 Facilities
Facilities are a key driver of supply chain performance
in terms of responsiveness and efficiency.
Locating facilities close to customers increases the
number of facilities needed and consequently reduces
efficiency.
Production facility and capacity: Receiving,
Prepackaging, Storing, Picking, Packaging, Sorting,
Accumulating, Shipping
◦ Crossdocking: Wal-Mart
 Facilities Metrics
Capacity measures the maximum amount a facility can
process.
Utilization measures the fraction of capacity that is
currently being used in the facility.
Theoretical flow/cycle time of production measures
the time required to process a unit if there are
absolutely no delays at any stage.
Actual average flow/cycle time measures the average
actual time taken for all units processed over a
specified duration such as a week or month.
 Facilities Metrics
Flow time efficiency is the ratio of the theoretical flow time to the actual
average flow time.
Product variety measures the number of products/product families
processed in a facility.
Volume contribution of top 20 percent SKUs and customers measures the
fraction of total volume processed by a facility that comes from the top 20
percent SKUs or customers.
Processing/setup/down/idle time
Average production batch size measures the average amount produced in
each production batch
Production service level measures the fraction of production orders
completed on time and in full.
 Sourcing
Role in the supply chain
◦ Set of processes required to purchase goods and services in a supply chain
◦ Supplier selection, single vs. multiple suppliers, contract negotiation
Role in the competitive strategy
◦ Sourcing is crucial. It affects efficiency and responsiveness in a supply chain
◦ In-house vs. outsource decisions- improving efficiency and responsiveness
● TI: More than half of the revenue spent for sourcing.
● Cisco sources: Low-end products (e.g. home routers) from China.
Components of sourcing decisions
◦ In-house versus outsource decisions
◦ Supplier evaluation and selection
◦ Procurement process:
 Sourcing Metrics
Days payable outstanding measures the number of days between when a
supplier performed a supply chain task and when it was paid.
Average purchase price measures the average price at which a good or
service was purchased during the year
Range of purchase price measures the fluctuation in purchase price
during a specified period
Average purchase quantity measures the average amount purchased per
order.
Fraction on-time deliveries measures the fraction of deliveries from the
supplier that were on time.
Supply quality measures the quality of product supplied.
Supply lead time measures the average time between when an order is
placed and the product arrives.
 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
Role in the competitive strategy
◦ Use pricing strategies to improve efficiency and responsiveness
◦ Low price and low product availability; vary prices by response times
● Amazon: Faster delivery is more expensive
Components of pricing decisions
◦ Pricing and economies of scale
◦ Everyday low pricing versus high-low pricing
◦ Fixed price versus menu pricing, depending on the product and services
 Pricing Metrics
Profit margin measures profit as a percentage of revenue.
Days sales outstanding measures the average time between when a sale is made
and when the cash is collected.
Incremental fixed cost per order measures the incremental costs that are
independent of the size of the order.
Incremental variable cost per unit measures the incremental costs that vary with
the size of the order.
Average sale price measures the average price at which a supply chain activity was
performed in a given period.
Average order size measures the average quantity per order.
Range of sale price measures the maximum and the minimum of sale price per unit
over a specified time horizon.
Range of periodic sales measures the maximum and minimum of the quantity sold
per period (day/week/month) during a specified time horizon
Considerations for Supply Chain
Drivers
Major Obstacles to Achieving Fit
SC is big:
◦ Variety of products/services
◦ Spoiled customer
◦ Multiple owners (Procurement, Production, Inventory,
Marketing) / multiple objectives
◦ Globalization

Local optimization and lack of global fit

Major Obstacles to Achieving Fit
Dealing with Multiple Owners / Local Optimization
◦ Information Coordination
● Information sharing / Shyness / Legal and ethical issues
◦ Contractual Coordination
● Mechanisms to align local objectives with global ones
◦ Coordination with (real) options
● Rare in the practice
◦ Without coordination, misleading reliance on metrics:
● Average safety inventory, Average incoming shipment size,
Average purchase price of raw materials, Revenue
Major obstacles to achieving fit
Instability and Randomness:
◦ Increasing product variety
◦ Shrinking product life cycles
◦ Customer fragmentation: Push for customization, segmentation
◦ Fragmentation of Supply Chain ownership: Globalization

Increasing implied uncertainty

Common problems
Lack of relevant SCM metrics: How to measure
responsiveness?
● How to measure efficiency, costs, worker performance, etc?
Poor inventory status information
● Theft: Major problem for furniture retailers.
● Transaction errors: Retailers with inaccurate inventory records for 65% of
SKUs
● Information delays, dated information, incompatible info. systems
● Misplaced inventory: 16% of items cannot be found at a major retailer
● Spoilage: active ingredients in the products are losing their properties
● Product quality and yield
● Lack of visibility in SCs
Common problems
Poor delivery status information
● Not knowing the order status
Poor IT design
● Unreliable, duplicate data
● Security problems: too much or too little
Ignoring uncertainties
Internal customer discrimination
● Giving lower priority to internal customers than external customers
Poor integration
Elusive inventory costs
● Accounting systems do not capture opportunity costs
SC-insensitive product design