A SUPPLY CHAIN is a global network used to deliver products and services
from raw materials to end customers through an engineered flow of
information, physical distribution, and cash.
SUPPLY CHAIN MANAGEMENT is the design, planning, execution, control, and
monitoring of supply chain activities with the objective of creating net value,
building a competitive infrastructure, leveraging worldwide logistics,
synchronizing supply with demand, and measuring performance globally.
Basic Structure
➢ Supplier/provider of goods and services/components
➢ Producer that receives services, materials, supplies and components to use in
creating finished products
➢ Customer that receives shipments of finished products to deliver to its
customers/consumers
Basic Structure
➢ Flow of Information – back and forth along the supply chain, within entities and
between the chain and external entities
➢ Primary Product Flow – materials and services from suppliers through producers to
final customers
➢ Primary Cash Flow – from customers back upstream to the raw material supplier
➢ Reverse Flow of Returned Products – repairs, recycling, remanufacturing, or disposal
Vertical Integration
➢ Practice of bringing the supply chain inside one organization
➢ The primary benefit of vertical Integration/SCM is control
Ownership/
Management/Marketing/
Sales/Finance
Showroom Final Customer
Distribution
Control Primary
Plant Materials/Product
Flow
Component Production
Raw Materials
Upstream Activities Downstream Activities
Initial 3rd Tier 2nd Tier 1st Tier 1st Tier 2nd Tier 3rd Tier Final
Supplier Supplier Supplier Supplier Customer Customer Customer Customer
Organization
Lateral Integration
➢ The organization specialises in its core competencies and relies on other
specialist for the rest of the supply chain
➢ Achieve economies of scale
➢ Improve business focus and expertise
➢ Leverage communication and production competencies
Manufacturing Supply Chain
Tier 2 Materials
Supplier Customer
Tier 1 Materials
Supplier
Distributor
Tier 2 Materials Customer
Supplier
Tier 2 Service Tier 1 Materials
Supplier Supplier
Manufacturer
Tier 2 Materials
Supplier Customer
Tier 1 Service
Supplier
Distributor
Tier 2 Service Customer
Supplier
Information Flow
Primary Product Flow
Primary Cash Flow
Service Industry Supply Chain
Fuel Supplies
Electric Backup Power
Commercial Customers
Electric Transformers
Electric Power
Home Customers
Utility
Facility Maintenance
Other Utilities
IT Services
Janitorial Services
Typical Supply Chain
Factors Alternative Structures
• Product’s Complexity
• Number of Components • SC Length – the number of tiers that
• Technology materials flow through between
• Value source and destination
• Bulk
• Perishability • SC Breadth – the number of parallel
• Availability routes that materials flow through,
• Profitability or the number of organizations in
each tier
• The amount of control
• The quality of service
• The costs
Operations
Operations
Operations
Operations
Manufacturer Customer
Consolidation
Manufacturer Customer
Point
Manufacturer Retailer Customer
Manufacturer Wholesaler Retailer Customer
Manufacturer Branches Retailer Customer
Manufacturer Branches Wholesaler Retailer Customer
LOGISTICS is the function responsible for all aspects of the movement and storage of
materials on their journey from original suppliers through to final customers.
• products – a complex package that contains a mixture of both goods and
services
Goods Balance of Goods and Services Services
Car House Book Fast Food Health
Holiday Education
Producers Builders Publisher Restaurant Service
• operations – create and deliver the products
Inputs Operations Outputs
People Manufacture Goods
Buildings Serve Services
Raw Materials Supply Profit
Equipment Transport Waste
Information Sell Wages
Investment Train
The Flow of Materials Controlled by Logistics
External Organization External
Suppliers Customers
Operations within an Organization
Inward Outward
Logistics Materials Management Logistics
Logistics
Definitions and Concepts
LOGISTICS: The task of coordinating material flow and information flow
across the supply chain.
A SUPPLY CHAIN is a global network used to deliver products and services
from raw materials to end customers through an engineered flow of
information, physical distribution, and cash.
SUPPLY CHAIN MANAGEMENT is the design, planning, execution, control, and
monitoring of supply chain activities with the objective of creating net value,
building a competitive infrastructure, leveraging worldwide logistics,
synchronizing supply with demand, and measuring performance globally.
Space gaps – suppliers physically separated from customers
Time gaps – difference between product availability and time of buying
Quantity gaps – mismatch between supply and demand
Variety gaps – difference between customer requirements and availability
Information gaps – customers are not aware of an existing product/service
Customer Service
• Achieving customer satisfaction
• Higher customer service needs more resources that come with higher costs
• Provide the best balance between customer service and costs
• Adding value – costs are less than the perceived benefits that it brings
Role of Logistics in Meeting Demand
Customers
Moved to Create
Logistics is
Supply responsible for all Demand
movement
Organize Passed to
Operations
Inputs
Other
needed by
Outputs
Operations
Effects on Financial Performance
Return on Assets = Profits Earned / Assets Employed
ROA = (Units Sold * Selling Price * Profit Margins) / (Current Assets + Fixed Assets)
Stocks Current Assets
Assets
Property,
Fixed Assets
Equipment, Plant
Return on
Customer Assets
Sales
Satisfaction
Product Features Price Profit
Operating Costs Profit Margin
Practical Example
ABC Company has sales of $ 10 million a year. Its inventories amount to 25% of sales, with annual
holding costs of 20% of the inventory value held. Operation costs (excluding the inventory costs) are
$ 7.5 million a year and other assets are estimated at $ 20 million. What is the current ROA? How will
this change if inventory levels are reduced to 20% of sales?
Current Position Inventory Reduced to 20% of Sales
• Inventory Costs= amount of stock * holding • Inventory Costs = 10 million * 0.2 * 0.2 = $
cost = 10 million * 0.25 * 0.2 = $ 0.5 million a 0.4 million a year
year • Total Costs = 7.5 million + o.4 million = $ 7.9
• Total Costs = operating costs + inv. costs = 7.5 million a year
million + o.5 million = $ 8 million a year • Profit = 10 million – 7.9 million = $ 2.1 million
• Profit = sales – total costs = 10 million – 8 a year
million = $ 2 million a year • Total assets = 20 million + 10 million * 0.2 = $
• Total Assets = other assets + inventory = 20 22 million
million + 10 million * 0.25 = $ 22.5 million • ROA = profit / total assets = 2.1 million / 22
• ROA = profit / total assets = 2 million / 22.5 million = 0.095 or 9.5%
million = 0.089 or 8.9%
Essential – every business relies on the movement of materials
Strategic importance – affects long-term performance
Expensive
Affects most operations in a company
Directly affects profits, lead time, reliability
Form links with upstream suppliers
Form links with downstream customers – customer satisfaction
Determines the best locations and sizes of facilities
Risky – safety, health, economic, environment
Foster growth of the other organizations in the supply chain
