What is Supply Chain Management?

Ujjal Kumar Mukherjee

Supply Chain of Our Favorite Cleaning
Detergent
Customer
Cleaning supply Distribution Supermarket /
purchases from
manufacturer. centers store
the store

Plastic container Packaging Chemical

producer manufacturer manufacturer

Petrochemical Paper
Timber industry
Processing unit Manufacturer
Illustration: Gas Supply at Gas Stations
Refineries Regional storages

Gas Stations

Off-shore oil platforms

Storage units
What Do We Observe From
These Illustrative Examples?
Points of supplies and points of demand can be
miles apart

Lead time of converting raw materials from

suppliers to usable products is significant

Supply chain consists of numerous

interdependent units that need to work in a
coordinated manner

Matching supplies with demand can be often

challenging
A Typical Supply Chain Configuration
Retailer
Supplier

Distributor Retailer
Supplier Supplier

OEM Retailer
Supplier Distributor
Supplier Factory

OEM
Supplier Distributor Retailer
Supplier Factory

Supplier Distributor Retailer

Retailer
What is Supply Chain
Management?

“Supply chain management is a set of

approaches utilized to efficiently integrate
suppliers, manufacturers, ware-houses, and
stores, so that merchandise is produced and
distributed at the right quantities, to the
right locations, and at the right time, in
order to minimize system-wide costs while
satisfying service level requirements.”

Taken from Simchi-Levi, D., et. al., Designing and Managing Supply Chains,
Supply Chain Management: Traditional
Versus Contemporary View

Traditional View Contemporary View

Network of connected entities Collaboration of partners

Holistic focus involving a large number of

Focus is primarily local across a few entities
entities

Create competitive advantage for the entire

Match supply with demand
supply chain

Flow of materials and finances Sharing of competencies and knowledge

Why is Supply Chain
Management Challenging?

Supply chain strategies have

complex interdependencies with other
functions.

Designing and operating supply chains

require system wide optimization.
Why is Supply Chain
Management Challenging?
Presence of uncertainties and risks at every
point in a supply chain.

Complex interdependencies of entities can

propagate and enhance risk across supply
chains.
Supply Chain and Product Development
Chain Plan / Product architecture
Make / buy decision
Design Supplier involvement
Product Development Chain

Strategic partnerships
Order Source Supplier selection
Monitor Supply contracts
Control

Source Produce Distribute Sell

Inventory management Network planning Promotions
Work-in-process and Logistic management Network planning
productivity management Inventory positioning Inventory pooling

Supply Chain

Source reference. Simchi-Levi, D., et. al., Designing and Managing Supply Chains, Third Ed., p. 1
Supply Chain Functions
Inventory management

Logistic and distribution network planning

Selection and monitoring of suppliers

Quality management and improvement in

supply chains

Designing contracts in supply chains

Supply chain integration and partnering

Managing flow and sharing of information

Global Supply Chains and Supply Chain
Risks

Ujjal Kumar Mukherjee

A Candy Bar Supply Chain

Cocoa – West Africa, Central and South

America, and parts of Asia

Nuts – Worldwide (depends upon type of nut)

Aluminum Foil (for wrapper) – West Indies,

North America, and Australia

Sugar – Brazil (primarily), India, and China

Paper (for wrapper) – North America

Source: National Geographic – Illicit, the Dark Trade

A Candy Bar Supply Chain

Raisins – California, Turkey, Chile

Milk – United States

Corn Syrup – United States, Europe, Brazil, and

Mexico

Vanilla – Madagascar, Indonesia, China, and

Mexico

Source: National Geographic – Illicit, the Dark Trade

Illustrative Example: Global Sourcing in the
US
Classification of Global Supply Chains

Global supply chain

Full range Off-shore

Functional Scope manufacturing

International
suppliers
International
distribution
Domestic
supply chains

Limited to
none Local Geographic Scope Many countries
Global Supply Chains

A global network of entities that cooperate in

demand fulfillment across different
geographies leveraging synergies.
Global Supply Chains:
Driving Factors

Cost Reduction

Access to products and technologies

Access to new markets

Access to knowhow and competencies

Global Supply Chains:
Challenges
1. Coordination across geographies

Geographical boundaries
Political boundaries
Cultural boundaries
2. Ensuring goal alignment across partners

3. Ensuring process and product quality across

geographies

4. Regulatory challenges across geographies

Global Supply Chains:
Risks

1. Operational Risks

Quality risks
Process non-conformance risks
Logistical disruption risk
Global Supply Chains:
Risks

2. Strategic Risks

Risk that all stakeholders would not be

acting in the best interest of the
organization
Data security and IPR risks
Regulatory risks
Global Supply Chains:
Risks

3. Financial Risks

Currency risks
Financial contractual risks
Global Supply Chains: Risk
Management
1. Closer coordination and partnership.

2. Gaining local knowledge through

collaborations.

3. Create slack to buffer against disruption.

4. Enhance mechanisms of advance

sensing.

5. Build in flexibility and agility in supply

chains.
Conclusion

Addressing a wider variety of challenges and

risks.

Adopting policies to mitigate risks.

Formulating a Supply Chain Strategy

Ujjal Kumar Mukherjee

Supply Chain Strategy
How do we seek to compete and provide
value to our customers?

What must our supply chain do particularly

well to support the competitive strategy?

Which resources and processes best

support our competency prioritization?

How do we select strategic partners and

structure the relationship with the partners
for long term value?
Pillars of Supply Chain Strategy
Basis of product Supply chain
competitiveness – competencies – cost,
positioning and flexibility, efficiency,
differentiation … responsiveness …

Pillars of Supply
Chain Strategy

Resource allocation –
Supply chain processes
technology,
– coordination, quality,
partnerships, network
control ...
design …
Understanding Product Types
Functional Versus Innovative Products

Functional Product Innovative Product

Customers’ primary buying Price Product features, customization,
decision criterion peer influence
How important is customization Not important Very much (personal product)

Risk of product obsolescence Low High

Product variety Low High

Forecast accuracy High (predictable market Low (uncertain market demand)

demand)
Product life cycle Long Short

Importance of brand Low High

Implications of Product Types on
Supply Chain Characteristics

Examples of implications:

For functional products, building cost

efficient supply chains is important.

For innovative products, building responsive

and flexible supply chains is important.

For functional products, standardization of

products and is important.
Implications of Product Types on
Supply Chain Characteristics

Examples of implications:

For innovative products, having slack

capacity is important.

For functional products, processes that

minimize in process inventories can be more
important than that for innovative products.
Supply Chain Types
Efficient supply chains:

Low cost (Select suppliers with lower costs for example)

High volume production

Standardization of production –high utilization of factory

Lower logistics cost –design efficient logistics network

Low focus on lowering of lead time

Minimize in process inventory. Lower inventory turnover

Usually higher lead times –low cost trumps shorter lead

time
Supply Chain Types
Responsive supply chains:

Lowering cost is not the primary focus

Supplier selection based on speed and flexibility

Inventory buffer is desirable

Short lead times are important

Buffer processing capacity

Delayed differentiation (Production

postponement)
Product Type: Supply Chain Type Matrix

Responsive
Premium fashion items –
supply chains high-end dresses, emerging
fashion, premium cars.

Technology products – automobiles,

white-goods, electronics.

Household consumables –
paper towels, packaged food.

Commodity products –
Efficient
metals, grains, fuels.
supply chains

Functional product Innovative product

Primary Decision Elements
That Influence the Choice
of a Supply Chain Design…
Cost of product

Lead time of delivery

Importance of quality

Frequency of product change and redesign

Industry clock speed

Product life cycle

Important Characteristics of High-
Performance Supply Chains:
The “Triple A” Supply Chain

Agility: the ability to respond to short-term

changes and manage.

Adaptability: the ability to sense and adapt

to long terms structural changes.

Alignment: the ability to create better

incentives for all entities.
Strategies to Build
Agile Supply Chains
Promote flow of information

Develop collaborative relationships

Design for postponement

Build inventory buffers

Dependable logistics systems and partners

Draw up contingency plans and develop

crisis management teams
Strategies to Build
Adaptability in Supply Chains

Monitor the environment to detect signals of

structural shifts

Monitor economies all over the world to

detect new sources of raw materials and
supply bases

Evaluate consumer sentiments and needs-

listen to your consumers
Strategies to Build
Adaptability in Supply Chains

Create flexible product designs

Create flexible manufacturing processes-

CAD/CAM/CNC

Determine where company products stand in

terms of technology cycle and product life
cycle
Strategies to Build
Alignment in Supply Chains
Exchange information freely with vendors and
consumers.

Adopt a long-term partnership focus than a

short- term transactional focus.

Lay down roles, tasks and responsibilities

clearly.

Equitably share risks, costs, and gains of

improvement initiatives.

Adopt proper supply chain contracting

mechanism to build the right incentives.
Conclusion

Supply chain strategy is critical in creating

long-term value and operational directions.​

Product and supply chain types need to be

matched appropriately.​

Agility, adaptability, and alignment of supply

chains are important considerations.
Supply Chain Alignment and Contracts

Ujjal Kumar Mukherjee

An Illustrative Example
An illustrative example from retailing
industry

Garment retailers often decide to provide a

discounted price

Who bears the cost of such discounts?

The retailer only, or

The manufacturer only, or​

Both manufacturer and retailer​

An Illustrative Example

Supply chain alignment occurs

when costs and incentives are equitably
distributed among the different entities of
a supply chain, such that all parties are
motivated to work towards the overall
success and profitability of the supply
chain, and not the parties only.
Why Incentives Get Out of
Line
Hidden actions: When firms cannot
observe other firms’ actions.

Example 1: An OEM changes product

designs without informing the suppliers.

Example 2: A supplier is building up or

reducing capacity or inventory without letting
the OEM know.

Ref: Narayanan V.G. and Ananth Raman, “Aligning Incentives in the Supply Chain”,
Harvard Business Review, Nov 2004​
Why Incentives Get Out of Line

Hidden Information: Reluctance of firms to

share information with other firms.

Example 1: The suppliers of big auto

manufacturers may not share
information about the costs of
manufacturing.

Example 2: The auto manufacturers may

not share the future market outlook
with suppliers.

Ref: Narayanan V.G. and Ananth Raman, “Aligning Incentives in the Supply Chain”,
Harvard Business Review, Nov 2004​
Why Incentives Get Out of Line

Badly designed incentive schemes: Too

much or too little emphasis on one factor.

Example 1: Retailers/distributors being

incentivized only on the volume of sales
and not margin.

Example 2: A supply chain where the

retailer shares very little of the profit
and revenue.

Ref: Narayanan V.G. and Ananth Raman, “Aligning Incentives in the Supply Chain”,
Harvard Business Review, Nov 2004
Summarizing the Examples
Let us return to the example of the garment retail
store to illustrate the lack of Alignment in Retail
Stores

1. Retailers buy clothing from manufacturers at a

wholesale price​

2. Initially sells them at a fixed retail price called the

list price

3. The retail stores ‘mark down’ excess unsold

inventory for clearing stock.

4. The retail store charges a fraction of the ‘markdown

money’ to the manufacturer. This is called ‘charge
back’.​
Ref: Narayanan V.G. and Ananth Raman, “Aligning Incentives in the Supply Chain”,
Harvard Business Review, Nov 2004
Summarizing the Examples

5. Understanding between the retail stores

and manufacturers about the chargeback.​

6. Requires proper accounting of store sales.​

7. In 2005, several clothing manufacturers

sued several retailers for deducting
chargeback without proper authorization.​

So, What was the problem? How can we

avoid similar situations?

Ref: Narayanan V.G. and Ananth Raman, “Aligning Incentives in the Supply Chain”,
Harvard Business Review, Nov 2004
Contracts in Supply Chains
Proper contracts can help in aligning
incentives in a supply chain

1. Specify the decision rights.​

2. Specify incentives, profit-share, bonus

payments, and discounts.​

3. Set penalties for non-fulfillment of

contractual obligations.​
Contracts in Supply Chains
4. Specify how overheads would be distributed
among the firms.​

5. Specify the review and monitoring

mechanisms.​

6. Therefore, broadly contracts specify:​

Extent of coordination

Sharing of risk and rewards

Participation in efforts to improve

efficiency and quality.
Contract Mechanisms
We will study three types of supply chain
contracts.​

1. Wholesale price contract, which is the

most basic.

2. Buy-back contract, which is a refinement

of the wholesale price.

3. Revenue sharing contract, which is a

more advanced contracting.
Wholesale Price Contracts
1. Manufacturer sells products to retailers at a wholesale price of w.

2. The retailer decides on the order quantity Q.

3. Assume that the salvage value of unsold items is zero.

4. Also, assume that demand is normally distributed with mean q and standard deviation s.

5. Sales price of the product is p (> w).

Who bears the risk of demand uncertainty?

Wholesale Price Contract
1. Cost of excess inventory is w (also called the overage cost)

2. Cost of lost sales is p-w (also called the underage cost)

3. Since the retailer decides on the order quantity Q, the retailer has a choice on how much to order

4. Optimal order quantity for the retailer is the order quantity that maximizes the retailer’s expected profit

5. Should the retailer order more or less than the mean demand q?

6. The optimal demand quantity that maximizes the profit of the retailer is:

∗
𝒑−𝒘
𝑸 =𝒒+𝒛 ×𝒔
𝒑
In-Video Exercise

Let us try to work out the following exercise.

If mean demand (𝑞) is 1000 and standard

deviation (𝑠) is 300, wholesale price (𝑤) is 10
and retail price (𝑝) is 15, then, what is the
quantity (𝑄) that the retailer is likely to order to
the manufacturer? In other words, what is the
∗
optimal order quantity (𝑄 ) for the retailer?

Please try to work this out yourself before

proceeding.
In-Video Solution
The solution is a straightforward application of the formula.

𝑝 − 𝑤 15 − 10
𝑺𝒕𝒆𝒑 𝟏: = = 0.33
𝑝 15

𝑝−𝑤
𝑺𝒕𝒆𝒑 𝟐: 𝑧 = 𝑁𝑂𝑅𝑀. 𝐼𝑁𝑉 0.33, 0,1 = −0.4307
𝑝

𝑝 − 𝑤
𝑺𝒕𝒆𝒑 𝟑: 𝑄 ∗ = 𝑞 + 𝑧 × 𝑠 = 1000 − 0.4307 × 300 = 871
𝑝

Note that the supply chains stores fewer quantities than the expected demand under the
wholesale price contract.
Buyback Contract Mechanism
1. In a wholesale price contract the risk of excess inventory is
borne completely by the retailer.

2. The incentives of the supply chain can be aligned by

sharing of this risk.

3. The manufacturer offers to buy back unsold cards at a price

𝒃(<= 𝒘).

4. The retailer still decides on the quantity to be ordered.

5. The optimal order quantity in this case is:

𝒑 − 𝒘
𝑸∗ = 𝒒 + 𝒛 ×𝒔
𝒑−𝒃
In-Video Exercise
Now Let us try to work out the following
exercise.

If the mean demand is 1000 and the standard

deviation is 300, wholesale price is 10 dollars,
the retail price is 15 and the buyback price is 5
dollars, then, what is the quantity that the retailer
is likely to order from the manufacturer?

Note that this is the same problem as earlier,

with the addition of the buyback price.

Please try to work this out yourself before

proceeding.
In-Video Solution

𝑝 − 𝑤 15 − 10
𝑺𝒕𝒆𝒑 𝟏: = = 0.5
𝑝−𝑏 15 − 5

𝑝−𝑤
𝑺𝒕𝒆𝒑 𝟐: 𝑧 = 𝑁𝑂𝑅𝑀. 𝐼𝑁𝑉 0.5, 0,1 = 0
𝑝−𝑏

∗
𝑝 − 𝑤
𝑺𝒕𝒆𝒑 𝟑: 𝑄 = 𝑞 + 𝑧 × 𝑠 = 1000 + 0 × 300 = 1000
𝑝−𝑏

The risk of demand uncertainty is now shared by both the manufacturer and
the retailer.
Revenue Sharing Contract
1. Manufacturer offers a very low wholesale price to
the retailer

2. In return the retailer offers a fraction of the revenue

earned from sales

3. The retailer and the manufacturer jointly share the

risk of demand uncertainty

4. The retailer has the incentive to order more than

the whole price contract order quantity
Revenue Sharing Contract

Retailer acts as a partner of the

manufacturer

Used for building long-term partnerships

Both retailer and manufacturer share the

profits as well as the risks
Trust Building, Supplier
Monitoring and Partnerships

Tools for supply chain coordination, other

softer aspects of supply chain
coordination and alignment are important.

Trust building plays an important role in

supply chain alignment.

Building a long-term partnership-based

relationship plays a very important role in
today’s complex global supply chains.
Trust Building, Supplier
Monitoring and Partnerships
Trust building requires a long-term approach,
such as involving suppliers from an early
stage of product development and business
development.

Information sharing is another aspect of trust

building in the long term.

In summary, building an aligned supply chain

requires both contracting and the softer
aspects of trust building, and information
sharing in a timely manner.
Supplier Selection, Development and
Monitoring

Ujjal Kumar Mukherjee

Steps of Sourcing Process
in a Supply Chain
Identification of needs - what do we need?

Supplier Identification - who can provide what we need?

Supplier Communication - what is expected from the

potential supplier?

Negotiations of terms - how much, when, and at what

price?

Supplier Liaisons and monitoring - here’s how it’s going.

Logistics Management - how do we optimally Control the

flow?
Step 1: Identification of
Needs

Some activities include

Technical requirements – product designs

and specifications

Develop a forecast for the next 3-5 years

Establish quality requirements

Step 2: Supplier
Identification

Buyers can:

Leverage existing supply base, or

Explore new suppliers.

Evaluation of suppliers’ capacities and

capabilities is important.
Step 2: Supplier Identification
The evaluation process
Request for Information (RFI) document: involves:

Name Visits, process, and

Location quality audits

Contact details Or external Audit reports

Current products and processes
Quality reports
Testimonials
Current customers
The selection process will result in a list of
Profitability and financials potential suppliers for further exploration,
Future plans negotiations, and selection.
Step 3: Supplier Communication
Request for Quotation (RFQ) document: Quotation Evaluation Criterion
Include:
Price quotations
Cost
Sensitivities of price to raw material costs
Quality
Volume
Capacity
Quality levels
Alignment with the buyer
Specifications

Development plans

Lead times
 Step 4: Supplier Negotiations
Negotiations can involve:

price negotiations,

delivery terms and conditions,

quality negotiations, and

contractual agreements.

Price negotiations can be:

face-to-face in a group or one by one.

electronic reverse auctions.

The figure here shows a potential reverse auction screenshot.

https://corporateshopaholic.files.wordpress.com/2010/12/reverse-auction1.jpg
Step 5: Supplier Liaisons
Supplier liaisons involve:

Product development and improvement initiatives

Process improvement projects

Manage the supplier score-card:

Quality Innovation

Cost Risk

Delivery Customer Complaints

Responsiveness Service levels

Step 6: Logistics Management
Managing and controlling the flow of materials
and finances

Important steps include:

Integration of information flow

Communicating forecasts

Ordering system and order management

Receiving system and quality checks and approvals

Step 6: Logistics Management

Important steps include:

Regular quality control systems of inbound material

Reverse logistics of returned items

Financial arrangements – establish credit lines

Managing inventory –at the supplier and at the

factory.
Total Cost of Ownership
(TCO)
The concept of TCO is to consider all
costs in a holistic manner.

Price reductions through:

Negotiations
Bundle purchases
Seeking lower-cost alternatives

https://www.purchasing-procurement-center.com/total-cost-of-ownership.html
Total Cost of Ownership
(TCO)
Reduction of internally driven costs such as:

Standardization of products and processes

Finding substitutes

Changing and managing product specifications

favorably

Reducing internal and external inventory

Demand and revenue management to reduce

uncertainty-driven costs

https://www.purchasing-procurement-center.com/total-cost-of-ownership.html
Total Cost of Ownership
(TCO)
Reduction of externally or jointly driven costs
such as:

Optimize handling, administration, and processing

Reduce system inventory

Change order quantity

Improve forecasting

Improve information transparency

The figure here is a good analogy of cost management in a
supply chain
https://www.purchasing-procurement-center.com/total-cost-of-ownership.html
Risks of Supply Chain
Management
The risks of supply chain management can
be grouped as:

A. Operational risks, such as quality risks,

delivery risks and capacity risks.

Close collaboration and control with suppliers

Understanding pain points and creation of

alternatives

Developing better forecasts, creating buffer

capacities, multiple sourcing
Risks of Supply Chain
Management
B. Strategic risks, such as the risk of
opportunism by suppliers, regulatory risks,
and social and ethical risks.

Contracting and vertical integration through

mergers and acquisitions.

Understanding regulatory risks, creating

domestic alternatives

Working closely with suppliers, and supplier

audits
Risks of Supply Chain
Management

C. Financial risks, such as risk of currency

fluctuations and risk of cost increases.

Currency hedging,

Long-term purchase contracts.

Conclusion

• Supply Chain is an important and challenging aspect of modern businesses in

a globalized World.

• Supply chains need to be controlled and managed with data, information, and
technologies.
Thank You