Supply Chain Management

UNIT 1
 INTRODUCTION
The term "supply chain management" was first coined by Keith Oliver in 1982.
However, the concept of a supply chain in management was of great
importance long before, in the early 20th century, especially with the creation
of the assembly line.
Supply chain refers to the way as to how materials flow from company’s
suppliers , through the company’s operations and then on to its customers .
A supply chain is a sequence of suppliers , warehouses, distributors ,retail
outlets and even customers themselves . Different companies may have
different supply chains due to the nature of their operations depending upon, it
is a manufacturing or a service organization .
There are basically three principal streams
1. Sourcing, procurement, and supply management
2. Materials management
3. Logistics and distribution
Objectives of supply chain management (SCM) :
1. To maximize overall value generated (diff. between worth of final product
to customer and efforts of SCM in meeting the customer’s expectations).
2. To achieve maximum profitability (Supply chain surplus=customer
surplus-supply chain cost)
3. To reduce supply chain costs to the minimum possible level.(by
applying supply chain analytics and operations research
methodologies)
 Warehouse
Supplier A

Storage of Storage of
Manufacturi Distributor
Supplier B raw finished
ng
materials goods

Factory
Supplier C Retailer

Conceptual Supply Chain model for a manufacturing Customer

organization
 Cab 1

Service
Passenger App server

Cab 2
Supply Chain model for a Cab service
Definition of Supply chain management
• According to Cooper and Ellram , “Supply chain management is an
integrative philosophy to manage the total flow of distribution
channel from the supplier to the ultimate user”.
• According to Christopher, “SCM is the management of upstream and
downstream relationships with suppliers and customers to deliver
superior customer value at less cost to the supply chain as a whole.
Difference between Supply Chain Management and Logistics

• All activities associated with flow of information , sourcing and

procurement of goods (raw or finished) , movement and management of
goods comes under the purview of Supply chain management (SCM) and
involves coordination with suppliers, intermediaries (external entities) and
ultimately customers . SCM deals with activities viz. purchasing, logistics,
warehousing AND vendor management (at every step).

• Logistics management is a sub function of SCM which only deals with

movement and management of goods within the organization (internally)
in an efficient manner . Peter Drucker , management expert says
Logistics as Today’s frontier.
Objectives of SCM
• 1. Reduce Operating Expenses
• Supply chain management provides an optimal links for supply chain to curtail the
cost of operations. This objective focuses on costs of materials while manufacturing or
procurement (make or buy), storage and usage including their handling and
transportation. Various EOQ models, selective inventory control techniques and
business economics models are evaluated and suitable methods may be adapted by the
organization for its operations including the inbound logistics.
• 2. Enhance Customer Satisfaction
• Supply chain management aims to maximize the customer satisfaction through an
efficient supply chain process. In fact, the purpose of the business is customer
satisfaction. Therefore, the ultimate objective for any supply chain function should aim
at the maximum satisfaction to both internal as well as the eternal customers by
reaching to the expectations of the customer
• 3. Improve Distribution Channel
• Supply chain management provides an efficient supply chain to business which
accelerates the whole process of distribution. Proper coordination in between
various transportation channel and warehouses is achieved for facilitating faster
movement of goods. This way the whole distribution system is enhanced which
enables in delivering product in right time and at right location.
• 4. Strengthen Financial Position
• It strengthens financial status of business by attaining better efficiency in its
process. Supply chain manager prevents any shortage of materials and focuses on
cutting any excessive costs. Any chance of funds blockage in inventories is avoided
by facilitating a speedy movement of goods. Optimum funds are always maintained
by managers within the business which leads to strengthen the financial status
• Regulate Proper Inventory
• Maintenance of proper inventory is must for continued operations of business. All
inventories such as raw materials, spare parts and finished product are properly
recorded by managers for maintaining a right stock always. Any situations like under
stocking or over stocking are avoided that leads to smooth functioning of business
organization
• 6. Promotes Better Coordination
• Supply chain management aims at establishing a better coordination among all
stakeholders of business. Proper channel is developed for easy communication of
employees, customers and suppliers with organization. Manager can easily direct their
employees and employees can also contact their supervisors via the established
channel in case of any problem erupts. It promotes exchange of information among all
parties and assist in bringing proper coordination within the organization.
IMPORTANCE OF SCM
• 1. Identifying potential problems.
• When a customer orders more products (materials) than the manufacturer can deliver, the buyer
can complain of poor service. Through data analysis, manufacturers may be able to anticipate the
shortage before the buyer is disappointed.
• 2. Optimizing price dynamically.
• Seasonal products have a limited shelf life. At the end of the season, these products are typically
scrapped or sold at deep discounts. Airlines, hotels and others with perishable “products” typically
adjust prices dynamically to meet demand. By using analytic software, similar forecasting
techniques can improve margins, even for hard goods.
• 3. Improving the allocation of “available to promise” inventory.
• Analytical software tools help to dynamically allocate resources and schedule work based on the
sales forecast, actual orders and promised delivery of raw materials. Manufacturers can confirm a
product delivery date when the order is placed — significantly reducing incorrectly-filled orders.
Evolution of Supply chain management
1.Ford Model- Beginning of 19th century
• Ford motor company was pioneered in integrating the entire supply chain.
• It was so efficient that it was documented that Ford can give the a car in
just 81hour, taking the iron from the ore , converting it into steel and
producing and assembling other parts on its own and selling it to
customer, they worked on a T-model and black colour car.
• At that time, Black and T model was considered as the symbol of efficient
of supply chain management. Although this model was so efficient but It
was inflexible and not responsive to the needs of customers because they
own the complete supply chain management, there were no
intermediaries in between and that’s why it was difficult to change ant
process or part at any point.
2.Toyota Model-1960
• Toyota , the Japan based company , After the second world war ,
started this model , of inviting multiple suppliers of different
components that were supposed to assembled it the car.
• It gave ownership of Supply chain to multiple vendors, there by they
were quick to fulfil the changing needs and demands of customers.
• Many companies even these days follow the same model of supply
chain.
3.The third Industrial Revolution-1995
• Dell started producing its Laptops in a customised manner , their supply
chain involved analysing the needs of customer first to produce different
components of laptop , so after gathering the data from customers , dell
managers used to pass the customised information and data of
customers to producers of laptop parts, for which their customers had to
wait more than 10 to 15 days
• Customers used to design their customised laptop on the website of dell
and there by placing and collecting order.
• After 2006, dell realised that more or less the needs of customers are
same, and then they also started the whole seller and retailer model.
• This model is based on real time data and information technology.
 Supply Chain Drivers

Transport
Inventory Facility Information Sourcing Pricing
ation

Logistical Drivers (Efficiency) Cross Functional Drivers (Responsiveness)

Company’s supply chain achieves the balance between efficiency and responsiveness by
meeting the needs of customers through Supply chain drivers . (COMPETITIVE STRATEGY-
SUPPLY CHAIN STRATEGY-SUPPLY CHAIN STRUCTURE)
Inventory
Inventory is maintained in supply chain to ease out the mismatches between supply and demand .
It is broadly classified as :

1. Raw materials

2. Work in process

3.Finished goods

4. MRO goods inventory

Types of inventory (Classification based on reasons for holding them)

1. Cycle inventory
Inventory which is maintained on a regular basis e.g. applicable for product categories selling
through out the year e.g. Automobiles , Consumer appliances (except AC, Air coolers, Blowers
etc.), many FMCG categories , Furniture etc.
Types of inventory (based on reasons for holding them) ..

2) Seasonal inventory
Inventory that is build up in anticipation of demand that arises at certain peculiar times of the
year. e.g. Summer product categories (Talcs , Deos, Face washes) Winter product categories
(Cold creams , Body lotions, Petroleum jelly etc.), Gifting stocks at the time of festive season
(Chocolates, juices, different types of branded snacks etc.)
It is maintained by producing extra quantity during slack or low demand period.

Facility
Facility is a physical location in the supply chain network where products are
manufactured OR assembled OR stored . Facilities are of TWO types :
1) Production sites (Manufacturing units)
2) Storage sites (Warehouses / Mother warehouses)
Facility ..
1. Production sites (Manufacturing units)
are the locations where product is manufactured.
2. Storage sites (Warehouses/ Bigger warehouses also called as Mother warehouses)
are the locations where product is stored . There are THREE main approaches to
warehousing :
a. SKU wise Storage
b. Job lot storage
c. Cross docking

a. SKU wise Storage

SKU wise storage is the most basic and traditional form of warehousing and used by companies when
they have a mix of SKUs some with huge demand and few with low demand . The SKUs with huge
demand (high selling/fast moving) need to be stocked separately . Idea is to have more space for HIGH
SELLING SKUs TO FACILITATE FASTER LOADING ON TO THE VANS AND also the unloaded stock from the
Let us understand sku wise storage with a simple example :

HUL manufactures and markets four sku’s of Dove Facewash viz. 7ml
, 25ml , 50ml and 100ml
Out of these four SKUs 50ml and 100ml have huge demand and
subsequently huge sales and CAN BE stocked in different godowns as
stocking them separately facilitates faster lifting by laborers and
subsequent faster loading on to the delivery vans and subsequently
faster dispatch from the warehouse .
Fast selling SKUs of various brands are actually the key SKUs of the company as they
contribute significantly towards the sales revenue of the company .
Facility ..

b. Job lot storage

Refers to storage of products separately for catering to specific needs of specific
customers.

Example :

Tyre Manufacturer
A tyre company manufacturing tyres for Hatchback segment cars, SUV segment cars,
Sedan segment cars for different companies will have separate storage space
(godowns) for tyres as per segment in case of different companies . This facilitates
faster loading on to the vans and facilitates faster dispatches too. This type of storage
also applies in case of contract manufacturing units (talcum powders, hair oils, soaps,
mobiles, electronic gadgets).
Facility ..
(3) Cross docking
Pioneered by Walmart . The name ‘cross docking’ explains the process of receiving products
at the warehouse through trucks through an inbound transportation dock and then
transferring to cross docking terminal through conveyor belts and from there to the outbound
transportation dock and then to trucks e.g. ecommerce companies such as Amazon and
Flipkart and all big warehouse locations (handling enormous volumes on a daily basis) in any
company in any industry . Activities like unloading , screening , sorting and reloading all
happens at the cross
docking terminal itself .
Transportation

Pipelines
Ship - (slowest and Rail - (slow and (Restricted to
economical) economical) products such as
oils and gases)

Truck (Most feasible Airplanes

and efficient means (fastest and
of transport) costly)
Information
1. It aims at ensuring a proper flow of information w.r.t logistical drivers viz.

inventory , facility and transportation .

2. It aims at ensuring a proper flow of information in terms of Forecasting.

3. It aims at ensuring a proper flow of information via ERP (lead time , freight,

profile of vendors, SOP etc.)

4. Ensures IT related infrastructure in place.

Sourcing
Sourcing (in SCM context) is related to :

1. Sourcing of raw materials & equipment .

2. Sourcing of transporter/supplier (vendor) for delivering raw materials &

equipment and finished goods.

3. Sourcing of manpower for warehouse for office work and house keeping
services.
Pricing
Pricing has two aspects :
1. Ensuring defining of correct pricing of products in ERP (by coordination with
commercial deptt.)
2. Price (freight) which a vendor (transporter) firm would charge for shipment
of goods from one location to another . (This also includes labor charges of
unloading of goods at the distributor point) . Loading charges are paid by the
warehouse to the labor post loading of goods on to the vans (at the
warehouse itself).

For e.g. A vendor (transporter) supplying co.s goods to a distributor at Lucknow

from a co’s warehouse at Kanpur charges a freight of Rs.19 PER CARTON. This
Rs.19 will also include Rs.1 i.e. unloading expense of labor at destination.
Please note : If fuel prices increase , freight also increases as it adds up to the
total cost of running the vehicle by the transporter .
Process view of a Supply chain
• There are two views of supply chain

Pull processes are initiated by a customer order, whereas push processes are initiated and performed in
anticipation of customer orders.
CYCLE VIEW
Cycle view of SCM
• Each cycle occurs at the interface between two successive stages of the supply chain. Not every supply chain will have four cycles
clearly
For separated.
example- a grocery supply chain in which a retailer stocks finished goods, inventories, and places
replenishment orders with a distributor is likely to have all four cycles separated. Dell , in contrast ,
bypasses the retailer and distributor when it sells directly to customers.

• All supply chain processes can be broken down into the following four process cycles-
1. Customer order cycle
2. Replenishment cycle
3. Manufacturing cycle
4. Procurement cycle
1.Customer Order Cycle-
• It occurs at interface between customer and retailer , initiated by customer
• Customer arrived-customer order entry- customer order fulfilment-receiving
2.Replenishment cycle-
• It occurs at interface between retailer and wholesaler/distributor, initiated
by retailer.
• Retail order triggered-retail order entry-retail order fulfilment-retail order
received
3. Manufacture order cycle-
It occurs at interface between wholesaler/distributor and manufacturer.
Initiated by customer , retailer, wholesaler.
• Order arrived-Production scheduling-Manufacturing and shipment-Order
Received
4. Procurement order cycle-
• It occurs at interface between manufacturer and supplier
• Initiated by manufacturer according to production schedule.
• Order arrived by manufacturer-Supplier Production scheduling-
Manufacturing and shipment of component-Order Received
• In supply chain , push and pull cycle together makes the supply chain
complete and effective As the push name suggest , pushing the
product towards the supply chain forcefully irrespective of the
demand of the customer .
• And as the pull suggests, pulling wilfully according to the own terms, a
customer gets the finished product from other corner of supply chain.
• The take of push and pull process for a supply chain manager is that
pull process is reactive , i.e., customers will whether buy or not buy
the product , and push process is pro-active in nature. i.e., started in
anticipation of the need and demand of customer , therefore , I
should maintain sufficient stock in inventory as and when needed.
• Example- Restaurant services for pull cycle and Grocery stores for
push cycle.
• A manger should consciously make the boundary of push and pull
process. He can do so with the help of real time data driven
technology like , SCM, ERP etc.
• In Generic example, Manufacture > Whole seller> Retailer> Customer,
Manufacture to Retailer , we observe a push process and retailer to
customer a pull process. Level of inventory will be high at each level in
push process and less inventory in pull process.
• It is quite possible to observe a pull process at distributor level, now
retailer will not keep the inventory in anticipation of demand.
• In most of the cases, the major risk bearer of the stock is
Manufacturer, and lesser risk with the retailers , depending upon the
data gathered through supply chain analytics a manger should
selected the boundary of push and pull process.