Supply Chain Management:

An Overview
Dr. Ranjan Ghosh
Indian Institute of Management
Calcutta
 Some Definitions
Supply Chain Management encompasses every effort
involved in producing and delivering a final product or
service, from the supplier’s supplier to the customer’s
customer. Supply Chain Management includes
managing supply and demand, sourcing raw materials
and parts, manufacturing and assembly, warehousing
and inventory tracking, order entry and order
management, distribution across all channels, and
delivery to the customer.
The Supply Chain Council, U.S.A.
 Customers,
Field demand
Sources: Regional Warehouses centers
plants Warehouses : sinks
: stocking
vendors stocking
ports points
points

Supply

Inventory &
warehousing
costs
Production/
purchase Transportati
on Transportati
on
costs costs Inventory & costs
warehousing
costs
Flows in a supply chain

Information

Product
Customer
Funds
 Some More Definitions
Supply Chain Management deals with the management of
materials, information, and financial flows in a network
consisting of suppliers, manufacturers, distributors and
customers.
Stanford Supply Chain Forum
Logistics involves “managing the flow of items, information,
cash and ideas through the coordination of supply chain
processes and through the strategic addition of place, period
and pattern values.
MIT Center for Transportation and Logistics
 Some More Definitions
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. Simchi-
Levi

Call it distribution or logistics or supply chain management. By

whatever name, it is the sinuous, gritty, and cumbersome process by
which companies move, materials, parts, and products to customers.
Fortune (1994)
 Key Observations
• Integrated activity:
* Among functions such as logistics, manufacturing, distribution,
design/engineering, marketing, finance,etc.
* Multiple organizations,i.e., suppliers, customers& 3 PL providers
* Coordination of conflicting goals, metrics, etc.
• Responsible for multiple flows:
* Information (orders, status, contracts)
* Physical (finished goods, raw material, w.i.p.)
* Financial (payment, credits, etc.)
 Key Observations (continued)
• Most analysis involves trade-offs
* Acrossdifferent entities
* Across metrics: Cost, Service, Time, Risk, etc.
• Each interface in the supply chain represents
* Movement of goods
* Information flows
* Transfer of title
* Purchase and sale
 Notable Quotes
• In the end, all business comes down to
Supply Chain vs. Supply Chain
Robert Rodin, CEO, Marshall Industries

• Japanese Manufacturing Industry owes its Competitive Advantage

and Strength to its Sub-Contracting Structure.
Ministry of International Trade and Industry, Japan (1992)

• Manufacturing now competes less on product and quality – which

are often comparable – and more on inventory turns and speed to
market.
John Kasarda, Forbes, 1999
 Philosophy of SCM
• The entire supply chain is a single, integrated
entity.

• The cost, quality and delivery requirements of

the customer are objectives shared by every
company in the chain.

• Inventory is the last resort for resolving supply

and demand imbalances.
 Efficiency: Basis of
Production Management
• Efficiency leads to lower costs
• Lower cost implies
Lower Price => Greater demand => Better
market growth => Higher profits => Product/
Process development => Better market share
• 1980s and 1990s: Era of achieving excellence at
the firm level (JIT, TQM, TPM, BPR, ERP, etc)
• 2000s: Era of achieving excellence at the value
chain level (SCM, CRM, E-Commerce, etc.)
 Evolution of SCM

Stage 1: Vendor – Purchase – Production

- Distribution – Retailer

Stage 2: Materials Management -

Logistics Management

Stage 3: Supply Chain Management

 Why is SCM Important?
• Strategic Advantage – It Can Drive Strategy
* Manufacturing is becoming more efficient
* SCM offers opportunity for differentiation (Dell) or cost
reduction (Wal-Mart or Big Bazaar)
• Globalization – It Covers The World
* Requires greater coordination of production and
distribution
* Increased risk of supply chain interruption
* Increases need for robust and flexible supply chains
 Why is SCM Important?
(continued)
• At the company level, supply chain management
impacts
* COST – For many products, 20% to 40% of
total product costs are controllable
logistics costs.
* SERVICE – For many products, performance
factors such as inventory availability
and speed of delivery are critical to
customer satisfaction.
 Conflicting Objectives in the
Supply Chain
1. Purchasing
• Stable volume requirements
• Flexible delivery time
• Little variation in mix
• Large quantities
2. Manufacturing
• Long run production
• High quality
• High productivity
• Low production cost
 Conflicting Objectives in the
Supply Chain
3. Warehousing
• Low inventory
• Reduced transportation costs
• Quick replenishment capability
4. Customers
• Short order lead time
• High in stock
• Enormous variety of products
• Low prices
Decision Phases in
a Supply Chain
• Supply chain strategy or design
• Supply chain planning
• Supply chain operation
Process view of a supply chain

• Cycle view

• Push/pull view
Cycle View of Supply Chains
Customer
Customer Order Cycle

Retailer
Replenishment Cycle

Distributor

Manufacturing Cycle

Manufacturer
Procurement Cycle
Supplier
Customer order cycle

• Customer arrival
• Customer order entry
• Customer order fulfillment
• Customer order receiving
Replenishment cycle

• Retail order trigger

• Retail order entry
• Retail order fulfillment
• Retail order receiving
Manufacturing cycle

• Order arrival from the

distributor, retailer, or customer
• Production scheduling
• Manufacturing and shipping
• Receiving at the distributor,
retailer, or customer
Push/Pull View of
Supply Chains

• Pull processes: execution is

initiated in response to a
customer order
• Push processes: execution is
initiated in anticipation of
customer orders
 Push/Pull View of Supply
Procurement,
Chains Customer Order
Manufacturing and Cycle
Replenishment cycles

PUSH PROCESSES PULL PROCESSES

Customer
Order Arrives
 SUPPLY CHAIN DESIGN:
Three Components
1. Insourcing/OutSourcing
(The Make/Buy or Vertical Integration Decision)

2. Partner Selection
(Choice of suppliers and partners for the chain)

3. The Contractual Relationship

(Arm's length, joint venture, long-term contract,
strategic alliance, equity participation, etc.)
 LESSONS IN
SUPPLY CHAIN DESIGN
1. KNOW YOUR LOCATION IN THE
VALUE CHAIN.
2. UNDERSTAND THE DYNAMICS OF
VALUE CHAIN FLUCTUATIONS.
3. THINK CAREFULLY ABOUT THE
ROLE OF VERTICAL COLLABORA-
-TIVE RELATIONSHIPS.
Dell Computer’s supply chain
• Customer
• Web page
• Assembly plant
• All of Dell’s suppliers and their suppliers
• Dell builds to order: customer order initiates
manufacturing at Dell
• Dell does not have a retailer, wholesaler, or
distributor in its supply chain
Dell Computer’s supply chain
• Dell carries only about 10 days of inventory (vs. 80
to 100 days of inventory for the competition)
• Less inventory to become obsolete, e.g., computer
chips
• Less inventory to be defective (implications of
small inventory and product quality)
• No finished product inventory; some parts no
inventory, e.g., Sony monitors
• Dell outsources service and support to 3rd party
providers
 Supply chain objective
• Maximize overall value generated
• Value strongly correlated to supply chain profitability –
the difference between the revenue generated from the
customer and the overall cost across the supply chain
• Example: A customer purchasing a computer from Dell
pays $ 700 (the revenue)
• Dell and other stages of the supply chain incur cost to
convey information, produce the components, store them,
transport them, transfer funds, etc.
Examples of Supply Chains

• Dell / Compaq
• Toyota / GM / Ford
• Milk Distribution System of NDDB
• Merry-Go-Round System of NTPC
• Dabbawalas of Mumbai
• Amazon / Borders / Barnes and Noble
 The Dynamics of the Supply
Chain
Order Size

Customer
Demand

Retailer
Retailer Orders
Orders
Distributor
Distributor Orders
Orders

Production
ProductionPlan
Plan

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
 The Dynamics of the Supply
Chain
Order Size

Customer
Demand

Production
ProductionPlan
Plan

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
 Three Types of Integration
of the Supply Chain

• Geographical Integration
*From local to world-wide logistics
• Functional Integration
* From Function-dominated logistics to
Flow-dominated logistics
• Inter-Firm Integration
* From a Sector-based Logistics to Inter-sector Logistics
Supply Chain Integration is Difficult
for two main reasons
• Different facilities in the supply chain may
have different, conflicting objectives
* For instance, the suppliers are in direct conflict with
the manufacturers’ desire for flexibility.
• The supply chain is a dynamic system
that evolves over time
* Not only do demand and supplier capabilities change
over time, but supply chain relationships also evolve
over time.
 Supply Chain: The
Magnitude
• In 1998, American companies spent $898 billion in
supply-related activities (or 10.6% of Gross Domestic
Product).
– Transportation 58%
– Inventory 38%
– Management 4%
• Third party logistics services grew in 1998 by 15% to
nearly $40 billion
 Supply Chain: The Magnitude
(continued)

• SOME ESTIMATES FOR INDIA

* Logistics Spend … IN Rs. 2,40,000 crores (approx.
US $ 50 Billion)
* Share of GDP …….…… 12-13 %
* Major Elements are ( Percentage of Total)
* Transportation ……… 35
* Inventories ……… 25
* Packaging ……… 11
* Handling & Warehousing ….. 9
* Others & Losses ……… 14
 Supply Chain:The Magnitude
(continued)

• It is estimated that the grocery industry in USA

could save $30 billion (10% of operating cost)
by using effective logistics strategies.
– A typical box of cereal spends 104 days getting from
factory to supermarket.
– A typical new car spends 15 days traveling from the
factory to the dealership.
 Supply Chain: The
Magnitude (continued)
• Compaq computer estimates it lost $500 million to $1 billion in sales in 1995
because its laptops and desktops were not available when and where
customers were ready to buy them.

• Boeing Aircraft, one of America’s leading capital goods producers, was

forced to announce write-downs of $2.6 billion in October 1997.
The reason? “Raw material shortages, internal and supplier parts
shortages…”. (Wall Street Journal, Oct. 23, 1997)
 Supply Chain: The Potential
• In 25 years, NDDB has enabled India to become the
largest producer of milk by implementing a logistics and
supply chain system that has eliminated several
intermediaries, thereby leading to a much higher
remunerative price (yield) for producers and lower price
for consumers.
• As described in the FORBES magazine, the Dabbawalas
of Mumbai has achieved an extremely high level of
reliability and precision (SIX SIGMA level in QA
parlance) in delivering to their customers the products
earmarked for them.
 Supply Chain: The
Potential
• Procter & Gamble estimates that it saved retail
customers $65 million through logistics gains over the
past 18 months.

“According to P&G, the essence of its approach lies in

manufacturers and suppliers working closely together
…. jointly creating business plans to eliminate the source
of wasteful practices across the entire supply chain”.
(Journal of Business Strategy, Oct./Nov. 1997)
 Supply Chain: The Potential

• Dell Computer has outperformed the competition in terms of

shareholder value growth over the eight years period, 1988-
1996, by over 3,000% (see Anderson and Lee, 1999) using
- Direct business model
- Build-to-order strategy.
 Supply Chain: The Potential
• In 10 years, Wal-Mart transformed itself
by changing its logistics system. It has the
highest sales per square foot, inventory
turnover and operating profit of any
discount retailer.
 Complexities Involved in
Supply Chain Management
• The supply chain is a complex network of
facilities and organizations with different,
conflicting objectives
• Matching supply and demand is a major
challenge
• System variations over time are also an
important consideration
• Many supply chain problems are new and there
is no clear understanding of all the issues
involved
 Supply Chain:
The Complexity
National Semiconductors:
• Production:
– Produces chips in six different locations: four in the US,
one in Britain and one in Israel
– Chips are shipped to seven assembly locations in
Southeast Asia.
• Distribution
– The final product is shipped to hundreds of facilities all
over the world
– 20,000 different routes
– 12 different airlines are involved
– 95% of the products are delivered within 45 days
– 5% are delivered within 90 days.
 Supply Chain Challenges
• Achieving Global Optimization
– Conflicting Objectives
– Complex network of facilities
– System Variations over time
 Sequential Optimization vs.
Global Optimization
Sequential Optimization

Procurement Manufacturing Distribution

Demand
Planning Planning Planning Planning
Global Optimization
Supply Contracts/Collaboration/Information Systems and DSS

Procurement Manufacturing Distribution

Demand
Planning Planning Planning
Planning

Source: Duncan McFarlane

 Supply Chain Challenges
• Achieving Global Optimization
– Conflicting Objectives
– Complex network of facilities
– System Variations over time
• Managing Uncertainty
– Matching Supply and Demand
– Demand is not the only source of uncertainty
 Managing Uncertainty
1. Point forecasts are invariably wrong
↓
Plan for forecast range – use flexible contracts
to go up/down.
2. Aggregate forecasts are more accurate
↓
Aggregate the forecast – postponement/risk
pooling
 Managing Uncertainty (cont’d)
3. Longer term forecasts are less accurate
↓
Shorten forecasting horizons – multiple
orders; early detection
4. In many cases, somebody else knows what is
going to happen
↓
Collaborate
 What’s New in SCM?

• Global competition

• Shorter product life cycle

• New, low-cost distribution channels

• More powerful well-informed customers

• Internet and E-Business strategies

Levels of implied demand
uncertainty
Detergent High Fashion
Long lead time steel Emergency steel

Customer Need
Price Responsiveness

Low High

Implied Demand Uncertainty

Understanding the Supply Chain: Cost-
Responsiveness Efficient Frontier
Responsiveness

High

Low
Cost
High Low
 Achieving Strategic Fit
Responsive
supply chain

Responsivenes e o f it
n F
s spectrum Zo egic
at
r
St

Efficient
supply chain

Certain Implied Uncertain

demand uncertainty demand
spectrum
 Key Concepts
• Design, operate, and control the physical and
information flows as though the channel were
one seamless corporate entity.
• Let the activities (and costs) migrate across
corporate boundaries to where they make the
most sense.
• Rely on the benefits of channel integration to
replace the benefits of open market forces.
• Share the risks and the rewards between players.
 New Concepts
• Push-Pull strategies
• Direct-to-Consumer
• Strategic alliances
• Manufacturing postponement
• Dynamic Pricing
• E-Procurement
 Dealing with Product Variety:
Mass Customization
Long

Lead Time
Short
Mass
Customization
t ion High Low Co
iza st
to m
s
Cu
Low
High
 Fragmentation of Markets
and Product Variety
• Are the requirements of all market segments served
identical?

• Are the characteristics of all products identical?

• Can a single supply chain structure be used for all products
/ customers? No! A single supply chain will fail different
customers on efficiency or responsiveness or both.
 Tailored Logistics
• Each Logistically Distinct Business (LDB) will have
distinct requirements in terms of
– Inventory
– Transportation
– Facility
– Information
Key: How to gain efficiencies while tailoring logistics?
 Applying the Framework
to e-commerce:
What is e-commerce?
• Commerce transacted over the Internet
– Is product information displayed on the
Internet?
– Is negotiation over the Internet?
– Is the order placed over the Internet?
– Is the order tracked over the Internet?
– Is the order fulfilled over the Internet?
– Is payment transacted over the Internet?
 Existing Channels
•
for Commerce
Product information
Physical stores, EDI, catalogs, face to face, …
–
Negotiation
•
Face to face, phone, fax, sealed bids, …
–
Order placement
•
Physical store, EDI, phone, fax, face to face, …
–
Order tracking
•
EDI, phone, fax, …
–
Order fulfillment
•
Customer pick up, physical delivery
–
 Revenue Impact of
E-Commerce
• Length of supply chain
• Product information
• Time to market
• Negotiating prices and contract terms
• Order placement and tracking
• Order fulfillment
• Payment
 Cost Impact of E-Commerce
• Facility costs
– Site and processing cost
• Inventory costs
– Cycle, Safety, Seasonal inventory
• Transportation costs
– Inbound and outbound costs
• Information sharing
– Coordination
 A Plethora of Approaches
• Just in Time Inventory
• Vendor Managed Inventory
• Quick Response
• Collaborative Planning, Forecasting and Replenishment
• Cross-docking / Flow through Centres
• Outsourcing / 3 PLs
• Activity Based Costing
• Internet / EDI
• Bar-Coding / RFID
• Build to Order
 A Plethora of Approaches
(continued)
• Partnerships / Alliances
• Auctions / Exchanges
• Postponement Strategies
• SC Software
• SC Event Management
• Merge-In-Transit
• Collaborative Transportation Management
• Cash – to – Cash Metrics
 Framework for analysis
• Model Based Approach
* Use fundamental models to gain insights
* Analytical, though not necessarily Operations
Research, approach
* Extensive use of case studies and real-life examples
• Total System Cost
* Avoid the silo effect of traditional logistics
* Capture and integrate across different players in SC
* Service can be included
 Framework for Analysis
(continued)
• Portfolio of Solutions
* Rarely is a single solution sufficient or practical
* A set of solutions is usually more applicable
* The context matters
• Management of Uncertainty
* Risk can be measured, monitored, and managed
* Impacts sourcing, contracting, pricing, incentives, etc.
 Modeling for SCM
• Forecasting Models
- These models allow prediction of demand based on past data or
other parameters that are independently available. They
enable better planning, given the lead-time necessary for
response.
• Location Models
- These models identify the optimal location of facilities such as
plants and warehouses, considering the inbound and outbound
transportation costs as well as the fixed and variable costs of
operation at the locations under consideration. These are
usually formulated as Mixed Integer Programming Models.
 Modeling for SCM (cont’d)
• Distribution Network Design Models
- These models are usually comprehensive in nature, deciding
between two, three and even four stages of distribution
network, location of warehouses and break-bulk points,
and sometimes even the transportation.
• Allocation Models
- These models help in optimally allocating commodities from
sources to destinations in a multi-source, multi-destination
environment. The costs considered for optimisation are
production costs and warehousing costs. The constraints
considered can be due to demand, capacity, route
restrictions, etc.
 Modeling for SCM (cont’d)
• Inventory Models
- Inventory plays a major role in SCM.
- Inventory can be of various types such as:
- Batching and shipment inventories
- Buffer stocks to take care of uncertainties
- Pipeline inventory ( primary and secondary
transportation )
These models minimize the total relevant cost, based on trade-
offs among, inter alia, inventory carrying cost, ordering cost,
stock-out cost, transportation cost, taxes & duties, etc.
 Modeling for SCM (cont’d)
• Routing Models
- These models allow optimal routing on a
transportation network from a given source to a
destination. The models used are the Shortest
Path Problem, the Traveling Salesman Problem
and the Vehicle Routing Problem. Decision
Support Systems that interactively use the
expertise of the decision maker by providing
graphical support through a map (i.e., using a
Geographical Information System ) are also very
useful in such decisions.
 Modeling for SCM (cont’d)
• Scheduling Models
- These models enable allocation of resources to
particular activities. Depending on the criteria of interest
and the number of resources, the models are of aid in
evaluating appropriate rules for allocation.
• Alternative Analysis
- This model simply proposes the identification of alternatives,
criteria for decision making and analysis of the alternatives
across the criteria to arrive at the best choice. Formal
approaches such as simulation and analytic hierarchy process
could be used in assessing the implications of the criteria.