CHAPTER ONE

INTRODUCTION TO SUPPLY
CHAIN MANAGEMENT
Learning Outcomes

After completing this chapter, you should be able to

1.1 Describe a supply chain and define supply chain management.
1.2 Recognize the importance of supply chain management
1.3 Discuss the major supply chain drivers
1.4 Identify Participants in the Supply Chain
1.5 State the current trends in supply chain management
Supply Chain Management Defined
To understand supply chain management, one must begin with a discussion of a supply chain; a
generic one is shown in Figure 1, The supply chain shown in the figure starts with firms extracting
raw materials from the ground—such as iron ore, oil, wood and food items—and then selling these to
raw material suppliers such as lumber companies, steel mills and raw food distributors. These firms,
acting on purchase orders and specifications they have received from component manufacturers, turn
the raw materials into materials that are usable by these customers (materials like sheet steel,
aluminium, copper, lumber and inspected foodstuffs). The component manufacturers, responding to
orders and specifications from their customers (the final product manufacturers) make and sell
intermediate components (electrical wire, fabrics, plumbing items, nuts and bolts, molded plastic
components, processed foods). The final product manufacturers (companies like Boeing, General
Motors, Coca-Cola) assemble finished products and sell them to wholesalers or distributors, who then
resell these products to retailers as their product orders are received. Retailers in turn sell these
products to us, the end-product consumers.
Figure 1 A Generic Supply Chain
According to the pervious explanations and the figure above we can define supply chain as “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.”
A number of definitions for supply chain management ( SCM ) are available in the literature and
among various professional associations. A few of these definitions are provided as follows:
• The Council of Supply Chain Management Professionals defines supply chain management as:
“The planning and management of all activities involved in sourcing and procurement,
conversion and all logistics management activities. Importantly, it also includes coordination and
collaboration with channel partners, which can be suppliers, intermediaries, third-party service
providers and customers.”
• The Singapore-based Logistics & Supply Chain Management Society defines supply chain
management as: “The coordinated set of techniques to plan and execute all steps in the global
network used to acquire raw materials from vendors, transform them into finished goods, and
deliver both goods and services to customers.”
The Importance of Supply Chain Management
It is well known that supply chain management is an integral part of most businesses and is essential to
company success and customer satisfaction. For these firms, even moderate supply chain management
success can mean lower purchasing and inventory carrying costs, better product quality and higher levels
of customer service—all leading to more sales. We can mention the importance of SCM in details as
follows:

1) Reduced Operating Cost by

 Decreased Purchasing Cost: Retailers rely on supply chains to deliver products quickly to avoid
holding costly inventories in storage units any longer than required. This ultimately brings down the
purchasing cost.

 Decreased Production Cost: Manufacturers rely on supply chains to deliver materials to assembly
plants to avoid material shortages that would shut down production, facilitating a seamless and cost-
efficient production process.
 Decreased Storage Cost: Efficient SCM optimises warehouse space and makes use of the most
efficient technology, accounting methods and inventory management tools, significantly reducing the
cost of doing business. This enables the firm to be more competitive in the market.

2) Greater Efficiency
When an organisation’s supply chain operations, including resource procurement, logistics, and delivery,
are tactically devised and executed, businesses can predict demand more precisely and formulate the
most efficient strategies to cater to it.

3) Higher Profits
Businesses tend to function at a high level of productivity when they use the best technology and
practices to meet the customer demand better, and each segment in the product’s lifecycle is optimised
to the fullest capacity. In such a situation, they experience increased sales, better brand image and
ultimately greater cash inflow. This, coupled with the benefits in costs, translates to increased profit in
absolute numbers, as well as a higher profit margin.
4) Improved Financial Position
Apart from increased profit levels, efficient Supply Chain Management directly affects the company’s
fixed assets and cash flow. Optimising the warehouse layout and implementing the appropriate
automation solutions to improve productivity go a long way in optimising the company’s fixed assets,
such as production units, warehouses, and transportation vehicles in the supply chain.

5) Better Quality Control

Efficient Supply Chain Management directly influences the quality of a company’s products and
services. Companies with better control over their suppliers enjoy improved quality control.

6) Customers expect the correct product and quantity to be delivered.

7) Customers expect products to be available at the right location.
8) Right Delivery Time – Customers expect products to be delivered on time
9) Right After Sale Support – Customers expect products to be serviced quickly.
The major supply chain drivers
Companies in any supply chain must make decisions individually and collectively regarding
their actions in five areas; production, inventory, location , transportation and information.

1. Production—What products does the market want? How much of which products should be
produced and by when? This activity includes the creation of master production schedules that
take into account plant capacities, workload balancing, quality control, and equipment
maintenance.

2. Inventory—What inventory should be stocked at each stage in a supply chain? How much
inventory should be held as raw materials, semifinished, or finished goods? The primary
purpose of inventory is to act as a buffer against uncertainty in the supply chain. However,
holding inventory can be expensive, so what are the optimal inventory levels and reorder
points?
3. Location—Where should facilities for production and inventory storage be located? Where are the most cost
efficient locations for production and for storage of inventory? Should existing facilities be used or new ones
built? Once these decisions are made they determine the possible paths available for product to flow through for
delivery to the final consumer.

4. Transportation—How should inventory be moved from one supply chain location to another? Air-freight and
truck delivery are generally fast and reliable but they are expensive. Shipping by sea or rail is much less
expensive but usually involves longer transit times and more uncertainty. This uncertainty must be compensated
for by stocking higher levels of inventory. When is it better to use which mode of transportation?

5. Information—How much data should be collected and how much information should be shared? Timely and
accurate information holds the promise of better coordination and better decision making. With good information,
people can make effective decisions about what to produce and how much, about where to locate inventory, and
how best to transport it.

The sum of these decisions will define the capabilities and effectiveness of a company’s supply chain.
Figure 2 The major supply chain drivers
Participants in the Supply Chain
In any given supply chain there is some combination of companies who perform different functions. There are
companies who are producers, distributors or wholesalers, retailers, and companies or individuals who are the
customers, the final consumers of a product. Supporting these companies there will be other companies that are
service providers that provide a range of needed services. These companies are explained in details as follows:

1-Producers
Producers or manufacturers are organizations that make a product. This includes companies that are producers of
raw materials and companies that are producers of finished goods. Producers of raw materials are organizations
that mine for minerals, drill for oil and gas, and cut timber. Producers of finished goods use the raw materials and
sub-assemblies made by other producers to create their products.
2-Distributors
A distributor is typically an organization that takes ownership of significant inventories of products that they buy
from producers and sell to consumers. In addition to product promotion and sales, other functions the distributor
performs are inventory management, warehouse operations, and product transportation, as well as customer support
and post-sales service. Distributors are also known as wholesalers.

3-Retailers
Retailers stock inventory and sell in smaller quantities to the general public. This organization also closely tracks
the preferences and demands of the customers that it sells to. It advertises to its customers and often uses some
combination of price, product selection, service, and convenience as the primary draw to attract customers for the
products it sells. Discount department stores attract customers using price and wide product selection.

4-Customers .
Customers or consumers are any organization that purchases and uses a product. A customer organization may
purchase a product in order to incorporate it into another product that they in turn sell to other customers. Or a
customer may be the final end user of a product who buys the product in order to consume it.
5- Service Providers
These are organizations that provide services to producers, distributors, retailers, and customers. Service providers
have developed special expertise and skills that focus on a particular activity needed by a supply chain. Because of
this, they are able to perform these services more effectively and at a better price than producers, distributors,
retailers, or consumers could do on their own.

Some common service providers in any supply chain are providers of transportation services and warehousing
services. These are trucking companies and public warehouse companies and they are known as logistics
providers. other service providers offer information technology and data collection services. All of these service
providers are integrated to a greater or lesser degree into the ongoing operations of the producers, distributors,
retailers, and consumers in the supply chain.

Supply chains are composed of repeating sets of participants that fall into one or more of these categories.
Examples of supply chain structure are shown in figure 3.
‫المورد النهائي‬ ‫العميل النهائي‬

‫‪Figure 3 Simple and extended supply chain structure‬‬

‫سلسلة االمداد البسيطة والممتدة‬
Current Trends in Supply Chain Management:
The practice of supply chain management is a fairly recent phenomenon, and many organizations are beginning to realize both the
benefits and problems accompanying integrated supply chains. a number of issues present themselves as areas that need to be
addressed including the expansion (or contraction) of the supply chain, increasing supply chain responsiveness, creating a
Green supply chain and reducing total supply chain costs. These issues will be discussed in details as follows :

1- Expanding (and Contracting) the Supply Chain

The supply chain expansion is occurring on two fronts: increasing the breadth of the supply chain to; include foreign
manufacturing, sales offices and retail sites, along with foreign suppliers and customers and increasing the depth of the supply
chain to include the influencing of second- and third-tier suppliers and customers.

The supply chain contraction emphasis was born with the recent economic downturn. Some have come to refer to these
contraction activities as right-shoring. Right-shoring is “the combination of onshore, near-shore and far-shore operations into
a single, flexible, low-cost approach to supply chain management”.
2- Increasing Supply Chain Responsiveness
Agile manufacturing, JIT, mass customization, lean manufacturing and quick response are all terms referring to
concepts that are intended to make the firm more flexible and responsive to customers’ changing requirements.

Responsiveness is” the process and outcome of organizational adjustments achieved as individual organizations
within a supply chain alter behaviours, norms, and/or policies to help place a supply chain and its members in a
favourable position to achieve customer value under dynamic environmental conditions”.

To achieve greater levels of responsiveness, supply chains must identify their end customers,
determine their needs, look at what the competition is doing and position their supply chain’s products and services
to successfully compete; then finally, consider the impact of these requirements on each of the supply chain
participants.
3- The Greening of Supply Chains
Purchasing, producing, packaging, moving, storing, repackaging, delivering and then returning or
recycling products can pose a significant threat to the environment in terms of discarded packaging
materials, scrapped toxic materials, carbon monoxide emissions, noise, traffic congestion and other
forms of industrial pollution. ‫ا‬

A green supply chain or sustainable supply chain could be defined as “the operational management
method and optimization approach to reduce the environmental impact along the life cycle of the
green product, from the raw material to the end product. These activities should lead to economic
growth, environmental protection, and social progress for green technology utilization”.

As the practice of supply chain management matures, governments along with firms and their supply
chain partners are working harder to reduce these environmental problems.
4- Reducing Supply Chain Costs :
As time passes, supply chain costs continue to decrease due to increased knowledge of
the supply chain processes, use of technology to improve information flow and
communication, benchmarking other successful supply chains to copy what they are
doing well and continued performance measurement and other process improvement
efforts.