CHAPTER 2

SUPPLY CHAIN MANAGEMENT: THE BASIC CONCEPTS

2.1 Defining Supply Chain Management

The practice of supply chain management is guided by some basic
underlying concepts that have not changed much over the centuries. Several
hundred years ago, Napoleon made the remark, “An army marches on its
stomach.” Napoleon was a master strategist and a skillful general and this
remark shows that he clearly understood the importance of what we would
now call an efficient supply chain. Unless the soldiers are fed, the army
cannot move.
Along these same lines, there is another saying that goes, “Amateurs talk
strategy and professionals talk logistics.” People can discuss all sorts of
grand strategies and dashing maneuvers but none of that will be possible
without first figuring out how to meet the day-to-day demands of providing
an army with fuel, spare parts, food, shelter, and ammunition. It is the
seemingly mundane activities of the quartermaster and the supply sergeants
that often determine an army’s success. This has many analogies in
business.
The term “supply chain management” arose in the late 1980s and came into
widespread use in the 1990s. Prior to that time, businesses used terms such
as “logistics” and “operations management” instead. Some definitions of a
supply chain are offered below:
• “A supply chain is the alignment of firms that bring products or services to
market.”
• “A supply chain consists of all stages involved, directly or indirectly, in
fulfilling a customer request. The supply chain not only includes the
manufacturer and suppliers, but also transporters, warehouses, retailers, and
customers themselves.”
• “A supply chain is a network of facilities and distribution options that
performs the functions of procurement of materials, transformation of these
materials into intermediate and finished products, and the distribution of
these finished products to customers.”
The definition of supply chain management developed and used by The
Global Supply Chain Forum: “Supply Chain Management is the integration of
key business processes from end user through original suppliers that
provides products, services, and information that add value for customers
and other stakeholders.”
Supply Chain Management is primarily concerned with the efficient
integration of suppliers, factories, warehouses and stores so that
merchandise 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.
2.2 The Objective of a Supply Chain Management
Supply Chain Management becomes a tool to help accomplish corporate
strategic objectives. SCM serves as a strategic enabler for organizations to
achieve their corporate objectives by optimizing working capital, improving
financial performance, enhancing operational efficiency, reducing costs, and
maximizing overall value creation across the supply chain. The following
objectives can be considered as the main objectives of Supply chain
Management,
a) Reducing Working Capital: By optimizing inventory levels, streamlining
procurement processes, and improving demand forecasting, SCM helps
minimize tied-up capital in inventory, freeing up resources for other
investments or operational needs.
b) Taking Assets off the Balance Sheet: SCM enables organizations to
leverage outsourcing, partnerships, or asset-light models to reduce the need
for large investments in fixed assets, thereby improving liquidity and
financial flexibility.
c) Accelerating Cash-to-Cash Cycles: SCM focuses on minimizing the
time it takes for cash to flow through the supply chain, from payment to
suppliers to receipt of payment from customers. This acceleration improves
cash flow and liquidity, enhancing the organization's financial health.
d) Reducing Costs: Through efficiency improvements, cost-saving
initiatives, and strategic sourcing, SCM helps organizations minimize costs
across the supply chain, including procurement, production, transportation,
and inventory management.
e) Minimizing Delays: By optimizing logistics, improving supply chain
visibility, and implementing risk mitigation strategies, SCM reduces the
likelihood of disruptions, delays, and bottlenecks in the supply chain,
ensuring smoother operations and timely delivery of products or services.
f) Maximizing Overall Value Created: SCM focuses on creating value for
customers while optimizing costs and resources throughout the supply chain.
By aligning supply chain activities with customer needs and market
demands, SCM enhances customer satisfaction and loyalty, ultimately
driving long-term value creation for the organization.
e) Increasing Inventory Turns: SCM emphasizes efficient inventory
management practices, such as just-in-time (JIT) inventory systems, demand-
driven replenishment, and vendor-managed inventory (VMI). By increasing
inventory turnover rates, SCM reduces holding costs, improves cash flow,
and minimizes the risk of obsolete inventory.
2.3 Supply Chain Management and Operations Management
Supply chain management (SCM) and operations management (OM) are two
closely related but distinct fields within the broader realm of business
management. Supply chain management and operations management are
distinct disciplines with different scopes and focuses, they are closely
intertwined and complementary in nature. Both are essential for the success
of an organization, with SCM addressing the broader supply chain dynamics
and external relationships, while OM deals with internal operational
processes and performance optimization. The relative importance of each
may vary depending on the organization's strategic priorities, industry
context, and competitive landscape.
Scope and Focus:
Supply Chain Management: SCM involves the planning, design, execution,
control, and monitoring of supply chain activities. It encompasses the entire
network of entities and processes involved in the creation and delivery of
goods and services, from raw material sourcing to end-user consumption.
SCM focuses on coordinating and optimizing these activities to ensure the
smooth flow of goods, information, and finances across the supply chain.
Operations Management: OM, on the other hand, deals with the design,
planning, execution, and control of operational processes within an
organization. It primarily focuses on the internal processes and activities that
directly contribute to the production of goods or delivery of services. OM
addresses areas such as production planning, inventory management,
quality control, process optimization, and capacity planning.
Integration:
Supply Chain Management: SCM emphasizes collaboration and
integration among various stakeholders in the supply chain, including
suppliers, manufacturers, distributors, retailers, and customers. It seeks to
optimize the entire supply chain network to achieve higher efficiency, lower
costs, faster response times, and greater customer satisfaction.
Operations Management: OM focuses more on the internal operations of
the organization, such as manufacturing processes, inventory management,
and distribution channels. While it may involve coordination with external
partners, its primary objective is to improve internal processes to enhance
productivity, reduce waste, and maximize resource utilization.
Time Horizon:
Supply Chain Management: SCM typically takes a broader and longer-
term perspective, considering the end-to-end supply chain dynamics over an
extended time horizon. It involves strategic decisions related to network
design, supplier selection, transportation modes, and inventory policies that
can have significant implications for the organization's competitiveness and
sustainability.
Operations Management: OM tends to focus more on short to medium-
term operational decisions aimed at achieving day-to-day efficiency and
effectiveness in production and service delivery. It involves tactical and
operational planning activities such as scheduling, capacity management,
and resource allocation to meet immediate demands and optimize
performance within the organization's operational constraints.
Importance for Organizations:
Both SCM and OM are crucial for the success and competitiveness of an
organization, but their relative importance may vary depending on factors
such as industry characteristics, market dynamics, and organizational
priorities.
Supply Chain Management: In today's globalized and interconnected
business environment, SCM plays a critical role in enabling organizations to
adapt to changing market conditions, mitigate supply chain risks, and
capitalize on opportunities for growth and expansion. Effective SCM can
enhance operational resilience, foster innovation, and create competitive
advantages through improved responsiveness, agility, and collaboration
across the supply chain ecosystem.
Operations Management: OM is equally important for organizations as it
directly impacts their ability to produce goods and deliver services
efficiently, cost-effectively, and at the desired level of quality. By optimizing
internal processes and resources, OM helps organizations achieve higher
productivity, lower costs, and better customer satisfaction. It lays the
foundation for operational excellence and continuous improvement, driving
long-term profitability and sustainability.
2.4 Process View of a Supply Chain
2.4.1 Cycle view of a Supply Chain
Processes in a supply chain are divided into a series of cycles, each
performed at the interfaces between two successive supply chain stages.
Each cycle occurs at the interface between two successive stages. Cycle
view clearly defines processes involved and the owners of each process.
Specifies the roles and responsibilities of each member and the desired
outcome of each process.
• Customer order cycle (customer-retailer)
• Replenishment cycle (retailer-distributor)
• Manufacturing cycle (distributor-manufacturer)
• Procurement cycle (manufacturer-supplier).
Each cycle in the supply chain involves specific processes and
responsibilities at the interface between two successive stages. The
objectives aimed at ensuring the smooth flow of materials, products, and
information between successive stages of the supply chain, ultimately
meeting customer demand efficiently and effectively.
1. Customer Order Cycle (Customer-Retailer)
This cycle starts when a customer places an order with the retailer. The
retailer then processes the order, checks inventory availability, and
communicates with the customer regarding delivery or pickup.
The retailer primarily owns this cycle, responsible for order processing,
inventory management, and customer service. Retailers ensure accurate
order fulfillment, timely delivery, and customer satisfaction. They may also
handle returns or exchanges.
The desired outcome of this cycle is to fulfill customer orders accurately and
efficiently, meeting customer expectations for product availability and
delivery times.
2. Replenishment Cycle (Retailer-Distributor)
After receiving customer orders, the retailer communicates replenishment
needs to the distributor. The distributor then prepares and ships the
requested products to the retailer's location.
Both the retailer and the distributor are involved in this cycle. The retailer
initiates replenishment, while the distributor manages inventory and fulfills
orders.
Retailers forecast demand, monitor inventory levels, and communicate
replenishment needs. Distributors manage inventory, handle order
processing, and ensure timely delivery.
The goal is to maintain optimal inventory levels at the retailer's location,
ensuring products are available to meet customer demand while minimizing
excess inventory and stockouts.
3. Manufacturing Cycle (Distributor-Manufacturer)
Upon receiving orders or demand forecasts from distributors, the
manufacturer schedules production, procures raw materials, manufactures
products, and prepares them for shipment.
The manufacturer primarily owns this cycle, responsible for production
planning, procurement, manufacturing, and quality control.
Manufacturers coordinate production schedules based on demand forecasts,
procure raw materials, oversee manufacturing processes, and ensure
product quality.
The objective is to produce goods efficiently, meeting quality standards and
delivery deadlines while minimizing production costs and lead times.
4. Procurement Cycle (Manufacturer-Supplier)
Manufacturers identify raw material requirements, issue purchase orders to
suppliers, receive and inspect incoming materials, and manage supplier
relationships.
The manufacturer drives this cycle, responsible for sourcing raw materials
and managing supplier relationships.
Manufacturers forecast material requirements, negotiate contracts, issue
purchase orders, monitor supplier performance, and resolve any issues
related to quality, delivery, or pricing.
The aim is to secure a reliable supply of raw materials at competitive prices,
ensuring consistent product quality and production continuity.
2.4.2Push/pull view of a Supply Chain
Processes in a supply chain are divided into two categories depending on
whether they are executed in response to a customer order (pull) or in
anticipation of a customer order (push).
Pull: (execution is initiated in response to a customer order (reactive). In a
pull-based supply chain, manufacturing is demand driven so that it is
coordinated with actual external customer demand rather than a forecast
Lead-time reduction occurs as the variabilities are better monitored in pull-
based SCM. Pull-based systems are often difficult to implement when lead
times are so long that it is impractical to react to demand information
Push: (execution is initiated in anticipation of customer orders
(speculative)). A push-based SCM takes longer to react to the changing
market place In a push-based supply chain, production decisions are usually
based on long-term forecasts In these strategies, SCM experience increased
transportation costs, high inventory levels and high manufacturing costs
Push/Pull View of Supply Chain Processes is useful in considering strategic
decisions relating to supply chain design – more global view of how supply
chain processes relate to customer orders. The relative proportion of push
and pull processes can have an impact on supply chain performance.
2.5 Supply-Chain Principles
If supply-chain management has become top management's new "religion,"
then it needs a doctrine. Andersen Consulting has stepped forward to
provide the needed guidance, espousing what it calls the "Seven Principles"
of supply-chain management. When consistently and comprehensively
followed, the consulting firm says, these seven principles bring a host of
competitive advantages. The seven principles as articulated by Andersen
Consulting are as follows:
1. Segment customers based on service needs. Companies traditionally
have grouped customers by industry, product, or trade channel and then
provided the same level of service to everyone within a segment. Effective
supply-chain management, by contrast, groups customers by distinct service
needs--regardless of industry--and then tailors services to those particular
segments.
2. Customise the Supply Chain Management network. In designing
their Supply Chain Management network, companies need to focus intensely
on the service requirements and profitability of the customer segments
identified. The conventional approach of creating a "monolithic" Supply
Chain Management network runs counter to successful supply-chain
management.
3. Listen to signals of market demand and plan accordingly. Sales and
operations planning must span the entire chain to detect early warning
signals of changing demand in ordering patterns, customer promotions, and
so forth. This demand-intensive approach leads to more consistent forecasts
and optimal resource allocation.
4. Differentiate product closer to the customer. Companies today no
longer can afford to stockpile inventory to compensate for possible
forecasting errors. Instead, they need to postpone product differentiation in
the manufacturing process closer to actual consumer demand.
5. Strategically manage the sources of supply. By working closely with
their key suppliers to reduce the overall costs of owning materials and
services, supply-chain management leaders enhance margins both for
themselves and their suppliers. Beating multiple suppliers over the head for
the lowest price is out, Andersen advises. "Gain sharing" is in.
6. Develop a supply-chain-wide technology strategy. As one of the
cornerstones of successful supply-chain management, information
technology must support multiple levels of decision making. It also should
afford a clear view of the flow of products, services, and information.
7. Adopt channel-spanning performance measures. Excellent supply-
chain measurement systems do more than just monitor internal functions.
They adopt measures that apply to every link in the supply chain.
Importantly, these measurement systems embrace both service and financial
metrics, such as each account's true profitability.
The principles are not easy to implement, the Andersen consultants say,
because they run counter to ingrained functionally oriented thinking about
how companies organise, operate, and serve customers. The organisations
that do persevere and build a successful supply chain have proved
convincingly that you can please customers and enjoy growth by doing so.