Unit 3: Supply chain management

Supply chain management: definition, nature, scope, objectives, evolution, importance

Decision phases in supply chain, process view; supply chain drivers; process tools; supply
chain dynamics; focus areas.

Introduction
A supply chain is a sequence of suppliers, transporters, warehouses, manufacturers,
wholesalers/distributors, retail outlets and final customers. Different companies may have
different supply chains due to the nature of their operations and whether they are primarily a
manufacturing operation or a service operation.

Definition
Supply Chain management integrates the suppliers, distributors and customer logistics
requirements into one interrelated process to include demand planning, forecasting, materials
requisition, order processing, inventory allocation, order fulfillment, invoicing and bills
payments
Supply Chain Management is a collection of actions required to coordinate and manage all
activities necessary to bring a product to market, including processing raw materials, producing
goods, transporting and distributing those goods and managing the selling process
Importance of Supply Chain Management
1. Reduce the total supply chain cycle: The total time for materials to travel through the
entire supply chain can be quite long. Since the materials spend so much time waiting
in inventory at various stages in the supply chain, there is a great opportunity to reduce
the total supply chain cycle time leading to a corresponding reduction in inventory,
increased flexibility, reduced costs and better deliveries.
2. Good relationship with customers and suppliers: Many companies have drastically
improved their internal operations and now find it necessary to consider relations with
 external customers and suppliers in the supply chain to gain further improvements in
their operations.
3. Supply Chain Thinking: Supply chain thinking is an application of systems thinking
and provides a basis for understanding processes that cut across a company’s internal
department and processes that extend outside the company as well.
4. Reduce risk and uncertainty in supply chain: The goals of supply chain management
are to reduce uncertainty and risks in the supply chain, thereby positively affecting
inventory levels, cycle time, processes and ultimately end-customer service levels. The
focus is on system optimisation.
5. Design, planning and operations: The design, planning and operation of a supply chain
have a strong impact on overall profitability and success.
6. Competitive Advantage: Supply chain management has become a hot competitive
advantage as companies struggle o get the right staff to the right place at the right time.
7. All the ‘Total quality Management’, ‘Just-in-Time system’, ‘Reengineering’, ‘Team
work’ and ‘delighting the customers” depends on the relationships with suppliers and
distributors who are part of the supply chain.
8. Managing different activities: Supply chain management includes transportation,
vendors, suppliers, distributors, banks, credit and cash transfers, bills payable and
receivable, warehousing and inventory levels, order fulfilment and sharing customer,
forecasting and production information.
9. Increase competitiveness: As firms strive to increase their competitiveness via product
customisation, high quality, cost reductions and speed-to-market, they place added
emphasis on supply chain management.
10. Minimising waste and maximising value: Supply chain management builds a chain of
suppliers that focus on both minimising waste and maximising value to the ultimate
customer. The key to effective supply chain management is to make suppliers
‘partners’ in the firm’s strategy to satisfy the ever-changing market place.
Nature and Scope of Supply Chain Management
Three important activities involved in supply-chain management
1. Purchasing
2. Logistics
3. Warehousing and expediting
Purchasing – involves the functions associated with buying the goods and services the firm
requires. Purchasing is responsible for obtaining the materials, parts and supplies needed to
produce a product or provide a service. The importance of purchasing is not only just the cost
of goods purchased, but also the quality of goods and services and the timing of deliveries of
goods and services, both of which can have significant impact on operations.
Purchasing is the link between the organisation and its suppliers. It exchanges information with
suppliers and functional areas. Operating units constitute the main source of requests for
purchased materials and close co-operation between these units and the purchasing department
is vital if quality, quantity and delivery goals are to be met. Accounting is responsible for
handling payments to suppliers, data processing is handled by the accounts department which
keeps inventory records, checks invoices and monitors vendor performance.
Design and engineering usually prepare material specifications which must be communicated
to purchasing.
Receiving checks incoming shipments of purchased items to determine whether quality,
quantity and timing objectives have been met and moves the goods to temporary storage.
Suppliers or vendors work closely with purchasing to learn what materials will be purchased
and what kinds of specifications will be required in terms of quality, quantity and deliveries.
The purchasing cycle begins with a request from within the organisation to purchase materials,
equipment, supplies or other items from outside the organisation and the cycle ends when the
purchasing is notified that a shipment has been received in satisfactory condition
Principles of purchasing
1. Right Quality - extent to which the goods and services purchased compiles with the
specification laid down
2. Right Quantity – decide the quantity to be purchased especially when dealing with the
discount offer to decide the optimum quantity
3. Right Price – price which minimizes the overall cost – Negotiation – Tender system
4. Right Time – time at which the goods requested should be received
Lead Time – refers to the time between the communication of the need for an item to
be purchased by the indentor till the item is actually received
5. Right Source – decisions as to the purchase for sources like directly from the manufacturers,
from which dealers, from which market etc
6. Right Place – the place the materials to be delivered
7. Right Procedure – procedure to be followed in purchasing
8. Right Contract – legal documentation
Purchase procedure (Steps)
1. Recognition of need, receipt and analysis of purchase requisition
- Officially bringing to the notice of the purchasing department
- What materials is required and of what quality
- Quantity of material to be purchased
- Date by which the material is required
- Place at which the material should be delivered
2. Selection of possible potential sources of supply
- Catalogues, Trade Journals, Advertisements, Trade Exhibitions, Trade
directories
- Potential Sources – buyer should consider:
 - whether to purchase from local market
- Whether to buy from a single vendor or from several vendors at a time
- Whether to purchase directly from manufacturers or through wholesalers
3. Making request for quotation
- Quotation – an estimate
- in the prescribed form to all the selected source of supply
- an enquiry to know whether the vendor can supply the desired material by the
specified date and the rate
- mentions terms and conditions in purchasing
4. Receipt and Analysis of Quotation
- Comparative statements are prepared with regards to rates and other terms and
conditions
5. Selection of right source of supply
- Through comparative statements will be able to select the right source of supply
considering quality, supply of material in time, adequate facilities of the vendor to handle the
contract etc
6. Issuing the purchase Order
- Legal document – contract for the delivery of the articles in accordance with the terms of
purchase agreement
- Serves as the vendor’s authority to transport the materials and bill the company
7. Follow-up and expediting the order
- obtain information as to the progress of the order
- ensure that delivery dates will be met
- take corrective action
8. Analysing receiving reports and processing discrepancies and rejections
Receiving reports are the records of what has been actually received
- Receiving reports are compared with purchase order
- If any discrepancies – should be brought to the notice of the supplier
9. Checking and approving vendor’s invoices for payment
Checking whether
- the correct material has been supplied
- the material has been supplied at agreed prices
 - agreed discount have been given
10. Closing completed orders
- making the payment and proper filing of documents
Factors to be considered in selection of Suppliers
1. Internal Facilities
- Has the supplier adequate facilities?
- Will he be able to supply you all the requirements in time and produce goods of the
quality required
- Adequate quality control and testing facilities
- Qualified and experienced people to take charge of production
2. Financial adequacy and stability
- Financial status
- Reputation in the market or with his bankers
3. Outlook
- Improvement in product by using modern techniques
- Improvement in Technology
- Efficient Management
- Research and Development
4. Reputation
- Reputation in the market with regards to quality, price, promise of delivery dates etc
5. Service
- After sales services
- Requirement of adequate maintenance engineers
6. Location
- Location nearby the firm
- Sales representation
7. Type of Supplier
- Direct manufacturer or an agent

2. Logistics: refers to the movement of materials within a production facility, the shipment of
incoming materials from suppliers and the shipment of outgoing products to customers
Activities in Logistics
- Removing materials from incoming vehicles and placing them on the receiving dock
- Moving materials from the receiving dock to inspections
- Moving materials from inspection to the warehouse and storing them until needed
- Retrieving materials from the warehouses and delivering them to production operations
when needed
- Moving materials between production operations
- Moving finished products from final assembly and storing them in the finished goods
warehouse
- Retrieving finished goods from the finished goods warehouse and delivering them to
packaging and shipping department
- Moving packaged finished goods to the shipping dock
- Loading finished goods into outgoing vehicles at the shipping dock
3. Warehousing and Expediting: Warehousing refers to the management of materials while
they are in storage including storing, dispersing, ordering and accounting of all kinds of
materials and finished goods.
Warehousing operation deals with materials that directly support operations. The first
problems that must be addressed are when to place order. Orders are placed and shipments
eventually appear in the receiving department, usually by either truck or rail, road.
Evolution of Supply Chain Management
Creation Era
- In the early 1980s
- Creation of assembly line
- Large scale changes, re-engineering, downsizing driven by cost reduction programmes
- Japanese practice of management
Integration Era
- Electronic data Interchange (EDI)
- Enterprise Resource Planning (ERP)
- Internet-based collaborative system
- Increasing value-adding and cost reduction through integration.
Electronic Data Interchange (EDI) is the electronic interchange of business information using
a standardized format; a process which allows one company to send information to another
company electronically rather than with paper.
Enterprise resource planning (ERP) refers to a type of software that organizations use to
manage day-to-day business activities such as accounting, procurement, project management,
risk management and compliance, and supply chain operations.
Globalisation Era
- Global systems of supplier relationships
- Expansion of supply chains over national boundariesDecision Phases in a Supply Chain
- Reducing costs through global sourcing
Specialisation Era – Phase One: Outsourced Manufacturing and Distribution
- Outsourcing
- Supply chain partnerships
Specialisation Era – Phase Two: Supply Chain Management as a service
- Specialisation within the supply chain – Transportation, Warehouse management,
Inventory management
- Specialised participants
Supply Chain Management 2.0
- Use of WWW
- Combination of the processes
- Speed and accuracy
- Continuous flexibility, value and success
Decision Phases in a Supply Chain
Design, Planning and Operations of a supply chain affect the overall profitability and success
of a firm
1. Supply Chain Strategy or Design
- Structuring the supply chain
- The location and capacities of production and warehousing facilities
- Products to be manufactured
- Modes of transportation
- Information system
2. Supply Chain Planning
- Set of policies and plans that govern short-term operations
- forecast for the coming year of demand in different markets
- Which market to be served from which locations
 - The planned build up of inventories and inventory management
- The subcontracting of manufacturing
3. Supply Chain Operations
- weekly or daily basis
- Individual customer orders
- implementing the operating policies
- Allocating individual orders to inventory or production
- Fulfilling orders
Process view of a Supply Chain
Cycle View

Customer Order Cycle: occurs at the customer/retailer interface

Customer arrival: customer visiting the location – decision regarding buying
Customer order entry: customer telling the retailer what products they want to buy and
retailer allocating those products to customers
Customer order fulfillment: refer to process by which the customer order is filled and
sent to the customer
 Customer order receiving: refers to the process by which customer receives what he/she
has ordered
Replenishment Cycle: include all processes involved in replenishing inventory of the retailer
Retail order Trigger: inventory must be replenished to meet future demand
Retail Order Entry: retailer places the order with the distributor or manufacturer –
ensure that an order is entered accurately and conveyed quickly to all supply chain
Retail Order fulfillment: retail order is filled by the distributor or manufacturer
Retail Order Receiving: order arrives at a retailer – receiving physically
Manufacturing Cycle: includes all processes in making the materials available
- Order arrival from the distributor, retailer or customer
- Production scheduling
- Manufacturing and Shipping
- Receiving at the distributor, retailer or customer
Procurement Cycle: includes all processes necessary to ensure that materials are available for
carrying out manufacturing as per the schedule
Push / Pull View of Supply Chain Process
Push processes – execution is in anticipation of customer order – demand is not known but
forecasted

Pull processes – execution is initiated in response to a customer order – demand is known with
certainty
 - Used in strategic decisions related to supply chain design
- Pull process – is regarded as reactive processes – reacting to customer demand
- Push process –is regarded as speculative processes – respond to forecast demand
Drivers of Supply Chain
The major drivers of supply chain performance consists of three logistical drivers and three
cross-functional drivers
Logistical drivers – Facilities, Inventory and Transportation
Cross-functional drivers – Information, sourcing and pricing
Company’s supply chain achieve the balance between responsiveness and efficiency that best
beets the needs of the company competitive strategy.

Facility are the actual physical locations in the supply chain network where product are stores,
assembled or fabricated.
The two major types of facilities are
Production sites (factories) and Storage sites (warehouses)
Factories can be built to accommodate one of two approaches to manufacturing
Product focus: A factory that takes a product focus performs the range of different operations
required to make a given product line from fabrication of different product parts to assembly
of these parts
Functional focus: A functional focus approach concentrates on performing just a few
operations such as only making a select group of parts or doing only assembly.
Warehousing: There are three main approaches to use in warehousing:
1. Stock keeping unit (SKU) storage: In this approach all of a given type of product is
stored together.
2. Job lot storage: In this approach all the different products related to the needs of a
certain type of customer or related to the needs of a particular job are stored together.
3. Cross docking: In this approach, product is not actually warehoused in the facility,
instead the facility is used to house a process where trucks from suppliers arrive and
unload large quantities of different products. These large lots are then broken down
into smaller lots. Smaller lots of different products are recombined according to the
needs of the day and quickly loaded onto outbound trucks that deliver the product to
their final destination.
So the fundamental trade-off that managers face when making facilities decision between
the cost of the number, location and type of facilities (efficiency) and the level of
responsiveness that these facilities provide the company’s customer.
Inventory encompasses all the raw materials, work in process, and finished goods within a
supply chain. Changing inventory policies can dramatically alter the supply chain’s efficiency
and responsiveness.
There are three basic decisions to make regarding the creation and holding of inventory:
1. Cycle Inventory: This is the amount of inventory needed to satisfy demand for the
product in the period between purchases of the product.
2. Safety Inventory: Inventory that is held as a buffer against uncertainty. If demand
forecasting could be done with perfect accuracy, then the only inventory that would be
needed would be cycle inventory.
3. Seasonal Inventory: This is inventory that is built up in anticipation of predictable
increases in demand that occur at certain times of the year
Transportation entails moving inventory from point to point in the supply chain.
Transportation can take the form of many combinations of modes and routes, each with its own
performance characteristics. There are six basic modes of transport that a company can choose
from:
Ship which is very cost efficient but also the slowest mode of transport. It is limited to use
between locations that are situated to navigable waterways and facilities such as harbor and
canals.
Rails which is also very cost efficient but can be slow. This mode is also restricted to use
between locations that are served by rail lines.
Pipelines can be very efficient but are restricted to commodities that are liquid or gases sucha
ass water, oil and natural gas.
Trucks are a relatively quick and very flexible mode of transport. Trucks can go almost
anywhere. The cost of this mode is prone to fluctuations though, as the cost of fuel fluctuates
and the condition of road varies.
Airplanes are a very fast mode of transport and are very responsive. This mode is also very
expensive mode and is somewhat limited by the availability of appropriate airport facilities.
Electronic transport is the fastest mode of transport and it is very flexible and cost efficient.
However, it can be only be used for movement of certain types of products such as electric
energy, data and products composed of data such as music, pictures and text.
Information serves as the connection between various stages of a supply chain, allowing them
to coordinate and maximise total supply chain profitability. It is also crucial to the daily
operations of each stage in a supply chain for eg. a production scheduling system.
Information is used for the following purpose in a supply chain:
1. Coordinating daily activities related to the functioning of other supply chain drivers:
facility, inventory and transportation
2. Forecasting and planning to anticipate and meet future demands. Available information
is used to make tactical forecasts to guide the setting of monthly and quarterly
production schedules and time table
3. Enabling technologies: Many technologies exit to share and analyse information in the
supply chain. Managers must decide which technologies to use and how to integrate
these technologies into their companies like internet, ERP etc.
Sourcing is the set of business processes required to purchase goods and services. Managers
must first decide which tasks will be outsourced and those that will be performed within the
firm.
Components of sourcing decisions
In-house or outsource: The most significant sourcing decision for a firm is whether to perform
a task in-house or outsource it to a third party. This decision should be driven in part by its
impact on the total supply chain profitability.
Supplier selection: It must be decided on the number of suppliers they will have for a particular
activity. They must then identify the criteria along which suppliers will be evaluated and how
they will be selected like through direct negotiations or resort to an action
Pricing determines how much a firm will charge for goods and services that it makes available
in the supply chain. Pricing affects the behaviour of the buyer of the goods or services, thus
affecting supply chain performance. For example if a transportation company varies its charges
based on the lead time provided by the customers, it is very likely that customers who value
efficiency will order early and customers who value responsiveness will be willing to wait and
order just before they need a product transported. This directly affects the supply chain in
terms of the level of responsiveness required as well as the demand profile that the supply chain
attempts to serve. Pricing is also a lever that can be used to match supply and demand.
Components of pricing decisions:
1. Fixed price versus menu pricing: A firm must decide whether it will charge a fixed
price for its supply chain activities or have a menu with prices that vary with some other
attribute, such as response time or location of delivery.
2. Every day low pricing versus high-low pricing.