Advance concepts of supply chain

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Advance concepts of supply chain

 Learning Objectives

 The Concept of Supply Chain

 Various definitions of Supply Chain & supply

chain management

 Goals of Supply Chain Management

 Objective of SCM

 Importance of SCM Decisions

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Advance concepts of supply chain

 Decision Phases in SCM

 SCM Vs. Logistics Management

 Supply Chain Drivers

 Decision areas of SC: SC Drivers

 Flows in a Supply Chain

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1. Learning Objectives - Questions

• What are the cycle and push/pull views of a supply

chain?
• How can supply chain macro processes be classified?
• What are the three key supply chain decision phases
and what is the significance of each?
• What is the goal of a supply chain and what is the
impact of supply chain decisions on the success of
the firm?

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 1. Learning Objectives

• Appreciate what a supply chain is and what it does

• Understand where your company fits in the supply

chains it participates in and the role it plays in
those supply chains

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 1. Learning Objectives

• Be able to discuss ways to align your supply

chain with your business strategy
• Start an intelligent conversation about the
supply chain management issues in your
company

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Let’s Start By Dispelling
Some Myths…

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FIRST

Supply Chain Management is NOT the

synonym for logistics or as logistics
that includes customers and suppliers

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SECOND

Supply Chain is NOT a new name for

purchasing or operations

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FINALLY

Supply Chain Management is NOT a

combination of purchasing, operations
and logistics

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Just What is Supply Chain
Management…??

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2. The Concept of Supply Chain

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2. The Concept of Supply Chain

• The Supply Chain is Not a chain of businesses, but

a Network of businesses and relationships
• That offers the opportunity to capture the full
potential of intra and inter - company integration
and management to organize
• People, activities, information and resources involved
in moving a product or service from supplier to
customer

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2. The Concept of Supply Chain

• Supply chains encompass the companies and the

business activities needed to
• Design,
• Make,
• Deliver, and

• Use a product or service

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2. The Concept of Supply Chain

• Businesses depend on their supply chains to provide

them with what they need to survive and thrive
• Every business fits into one or more supply chains and
has a role to play in each of them

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2. The Concept of Supply Chain

• Two factors have made it important for companies to

be aware of the supply chains they participate in and
to understand the roles that they play:
• The pace of change
• The uncertainty about how markets will evolve

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2. The Concept of Supply Chain

• Those companies that learn how to build and

participate in strong supply chains will have a
substantial competitive advantage in their markets
• The practice of supply chain management is guided by
some basic underlying concepts that have not changed
much over the centuries
• “An army marches on its stomach.” (Napoleon)

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2. The Concept of Supply Chain

• The term “supply chain management” arose in the late

1980s and came into widespread use in the 1990s.
• Prior to that time, businesses used terms such as
“logistics” and “operations management” instead

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2. The Concept of Supply Chain

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3. Various definitions of supply chain &
supply chain management

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Supply Chain

“A supply chain is the alignment of firms that

bring products or services to market.”

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Supply Chain

“A supply chain consists of all stages involved,

directly or indirectly, in fulfilling a customer
request. The supply chain not only includes the
manufacturer and suppliers, but also transporters,
warehouses, retailers, and customers themselves.”

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Supply Chain

“A supply chain is 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.”

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Supply Chain Management

“ If this is what a supply chain is then we can

define supply chain management as the things we
do to influence the behavior of the supply chain
and get the results we want.”

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Supply Chain Management

“The systemic, strategic coordination of the

traditional business functions and the tactics
across these business functions within a
particular company and across businesses
within the supply chain, for the purposes of
improving the long-term performance of the
individual companies and the supply chain as a
whole.”
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Supply Chain Management

“Supply chain management is the coordination of

production, inventory, location, and
transportation among the participants in a
supply chain to achieve the best mix of
responsiveness and efficiency for the market
being served.”

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4. Goals of Supply Chain Management

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4. Goals of Supply Chain Management

• The goal of Supply Chain Management is:

“Increase throughput while simultaneously reducing

both inventory and operating expense.”
• In this definition throughput refers to the rate at
which sales to the end customer occur.

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5. Objective of SCM

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5. Objective of SCM

Value Chain Management

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5. The Objective of a Supply Chain

• Maximize overall value created

• Supply chain value:
• Difference between
• What the final product is worth to the
customer and
• The effort the supply chain expends in filling
the customer’s request

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5. The Objective of a Supply Chain

• Value corresponds to supply chain profitability:

• Difference between
• Revenue generated from the customer and
• The overall cost across the supply chain

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Example

• Dell receives $2000 from a customer for a computer

(revenue)
• Supply chain incurs costs
• Information,
• Storage,
• Transportation,
• Components,
• Assembly, etc.

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Example

• Difference between $2000 and the sum of all of

these costs is the supply chain profit
• Supply chain profitability is total profit to be
shared across all stages of the supply chain
• Supply chain success should be measured by total
supply chain profitability, not profits at an
individual stage

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5. The Objective of a Supply Chain

• Sources of supply chain revenue: the customer

• Sources of supply chain cost:
• Flows of information,
• Products, or
• Funds between stages of the supply chain

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5. The Objective of a Supply Chain

• Supply chain management is the management of

flows between and among supply chain stages to
maximize total supply chain profitability

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6. Importance of SCM Decisions

Dell’s Success Story

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7. Decision Phases in SCM

A. SC Strategy or Design
B. SC Planning or Plan
C. SC Operation or Operate
D. Process View of a SC

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A. Supply Chain Strategy or Design

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A. Supply Chain Strategy or Design

• Strategic supply chain decisions

• Locations and capacities of facilities
• Products to be made or stored at various locations
• Modes of transportation
• Information systems

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A. Supply Chain Strategy or Design

• Supply chain design must support strategic

objectives
• Supply chain design decisions are long-term and
expensive to reverse – must take into account
market uncertainty
• Definition of a set of policies that govern short-
term operations
• Starts with a forecast of demand in the coming year

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B. Supply Chain Planning

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B. Supply Chain Planning

• Planning decisions:
• Which markets will be supplied from which
locations
• Planned buildup of inventories
• Subcontracting, backup locations
• Inventory policies
• Timing and size of market promotions

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B. Supply Chain Planning

• Must consider in planning decisions

• Demand uncertainty,
• Exchange rates,
• Competition over the time horizon

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C. Supply Chain Operation

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C. Supply Chain Operation

• Time horizon is weekly or daily

• Decisions regarding individual customer orders
• Supply chain configuration is fixed and operating
policies are determined
• Goal is to implement the operating policies as
effectively as possible

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C. Supply Chain Operation

• Allocate orders to inventory or production, set order

due dates, generate pick lists at a warehouse,
allocate an order to a particular shipment, set
delivery schedules, place replenishment orders
• Much less uncertainty (short time horizon)

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D. Process View of a Supply Chain

• Cycle view: processes in a supply chain are divided

into a series of cycles, each performed at the
interfaces between two successive supply chain
stages

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8. Supply Chain Management Vs. Logistics
Management

• Logistics typically refers to activities that occur

within the boundaries of a single organization and
supply chains refer to networks of companies that
work together and coordinate their actions to
deliver a product to market.

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8. Supply Chain Management Vs. Logistics
Management

• Traditional logistics focuses its attention on

activities such as
• Procurement,

• Distribution,

• Maintenance, and

• Inventory management.

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8. Supply Chain Management Vs. Logistics
Management

• Supply chain management acknowledges all of

traditional logistics and also includes activities such as
• Marketing,

• New product development,

• Finance, and

• Customer service.

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8. Supply Chain Management Vs.
Logistics Management

• Supply chain management views the supply chain

and the organizations in it as a single entity.
• It brings a systems approach to understanding
and managing the different activities needed to
coordinate the flow of products and services to
best serve the ultimate customer.

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 9. Supply Chain Drivers

“Increase
throughput while 1. 2.
PRODUCTION INVENTORY
What, how, and How much to
simultaneously when to produce make, how much
to stock
reducing inventory
and operating 5.
INFORMATION
Basis for making
expense.” these decisions

Goldratt, The Goal ,

4. 3.

Responsiveness
TRANSPORTATION LOCATION
How and when to Where best to do
move product what activity
vs.
Efficiency
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10. Decision areas of Supply Chain:
Supply Chain Drivers

• There is a basic pattern to the practice of supply

chain management.
• Each supply chain has its own unique set of market
demands and operating challenges and yet the issues
remain essentially the same in every case.

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10. Decision areas of Supply Chain:
Supply Chain Drivers

• Companies in any supply chain must make decisions

individually and collectively regarding their actions in
five areas (called supply chain drivers).
• Effective supply chain management calls first for an
understanding of each driver and how it operates.

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10. Decision areas of Supply Chain:
Supply Chain Drivers

• Each driver has the ability to directly affect the

supply chain and enable certain capabilities.
• The fundamental decision that managers face when
making decisions about each driver is how to resolve
the trade-off between responsiveness and efficiency.

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10. Decision areas of Supply Chain:
Supply Chain Drivers

Supply chain decision

A. Production
B. Inventory
C. Location
D. Transportation
E. Information

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A. SCD-Production

• Typical Questions are:

• What products does the market want?

• How much of which products should be produced
and by when?

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A. SCD-Production
• This activity includes the creation of master
production schedules that take into account
• Plant capacities,

• Workload balancing,
• Quality control, and

• Equipment maintenance

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B. SCD- Inventory

• A buffer against uncertainty in the supply chain

• Typical questions are:

• What inventory should be stocked at each stage
in a supply chain?

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B. SCD-Inventory

• Typical questions are:

• How much inventory should be held as raw

materials, semi-finished, or finished goods?
• What are the optimal inventory levels and
reorder points?

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C. SCD-Location

Typical questions:
• 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?

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C. SCD-Location

• Once these decisions are made they determine the

possible paths available for product to flow through
for delivery to the final consumer.

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D. SCD-Transportation

Typical questions:
• How should inventory be moved from one supply
chain location to another?
• When is it better to use which mode of
transportation?

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D. SCD-Transportation

• 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.

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E. SCD-Information

Typical questions:
• How much data should be collected and how much
information should be shared?

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E. SCD-Information

• 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.

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10. Decision areas of Supply Chain:
Supply Chain Drivers

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10. Decision areas of Supply Chain:
Supply Chain Drivers

A. Production
B. Inventory
C. Location
D. Transportation
E. Information

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A. Production

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A. Production

• The capacity of a supply chain to make and store

products.
• The facilities of production are factories and
warehouses.

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Excess capacity

• A lot of excess capacity can increase flexibility and

responsiveness against wide swings in product demand.
• But excess capacity costs money and decreases
operations efficiency because it is idle capacity (not
in use) and not generating revenue

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Approaches to manufacturing

• Factories can be built to accommodate one of two

approaches to manufacturing:
• Product focus—A factory performs the range of
different operations required to make a given
product line (e.g. fabrication to finishing).
• Functional focus—A factory focuses on performing
just a few operations (e.g. only making a select
group of parts or only doing assembly).

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Production focus

• A product focus results in developing expertise about a

given set of products.
• A functional focus results in expertise about particular
functions.
• Companies need to decide which approach or what mix of
these two approaches will give them the capability and
expertise they need to best respond to customer demands.

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Production approaches

• As with factories, warehouses too can be built to

accommodate different approaches.
• There are three main approaches to use in
warehousing:

1) Stock keeping unit (SKU) storage

2) Job lot storage

3) Cross docking

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1) Stock keeping unit (SKU) storage

• All of a given type of product is stored together.

• Efficient and easy to understand way to store

products.

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2) Job lot storage

• 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.
• Efficient picking and packing operation.

• Requires more storage space.

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3) Cross docking

• Warehouse doesn’t store the product but the process.

• Trucks from suppliers arrive and unload large lots of
different products.
• Large lots are then broken down into smaller lots.

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3) Cross docking

• Smaller lots of different products are recombined

according to the needs of the day.
• The combined lots are loaded onto outbound trucks
that deliver the products to their final destination.

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B. Inventory

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B. Inventory

• Inventory is spread throughout the supply chain and

includes everything from raw material to work in
process to finished goods.
• Holding large amounts of inventory allows a company
or an entire supply chain to be very responsive to
fluctuations in customer demand but it decreases the
operations efficiency because of increased cost of
creation and storage of inventory.

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Basic decisions for creation and holding of
inventory

• There are three basic decisions to make

regarding the creation and holding of
inventory:
1) Cycle Inventory
2) Safety Inventory
3) Seasonal Inventory

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1) Cycle Inventory

• Amount of inventory needed to satisfy demand for the

product in the period between purchases of the
product.
• Amount of inventory needed to satisfy demand for the
product Large cycle inventories are maintained to gain
the advantages of economies of scale.
• Large cycle inventories increases inventory carrying
costs (cost to store, handle, and insure the inventory).

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1) Cycle Inventory

• Managers face the trade-off between the reduced cost

of ordering and better prices offered by purchasing
product in large lots and the increased carrying cost of
the cycle inventory that comes with purchasing in large
lots.

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2) Safety Inventory

• That is held as a buffer against uncertainty in

demand forecasting.
• The trade-off here is to weigh the costs of carrying
extra inventory against the costs of losing sales due
to insufficient inventory.

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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 (e.g. increase in the demand of
anti-freeze in the winter).

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Fixed production rate

• Companies with fixed production rate, that is

expensive to change, will try to manufacture product
at a steady rate all year long and build up inventory
during periods of low demand to cover for periods of
high demand that will exceed its production rate.

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Flexible manufacturing facilities

• The alternative to building up seasonal inventory is to

invest in flexible manufacturing facilities that can
quickly change their rate of production of different
products to respond to increases in demand.
• The trade-off here is between the cost of carrying
seasonal inventory and the cost of having more
flexible production capabilities.

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C. Location

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C. Location

• Location refers to the geographical siting of

supply chain facilities.
• Location decision also includes the decisions
related to which activities should be
performed in each facility.

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Location trade-offs

• Here the trade-off is whether to centralize

activities in fewer locations to gain economies
of scale and efficiency, or to decentralize
activities in many locations close to customers
and suppliers in order for operations to be
more responsive.

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Range of factors related to Location
• When making location decisions, managers need to
consider a range of factors that relate to a given
location including:
• Cost of facilities
• Cost of labor
• Skills available in the workforce
• Infrastructure conditions

• Taxes and tariffs

• Proximity to suppliers and customers.
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Location decisions

• Location decisions are strategic decisions

because they commit large amounts of money
to long-term plans.
• Location decisions have strong impacts on the
cost and performance characteristics of a
supply chain.

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Location decisions

• Once the size, number, and location of facilities

is determined, that also defines the number of
possible paths through which products can flow
on the way to the final customer.
• Location decisions reflect a company’s basic
strategy for building and delivering its products
to market.

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D. Transportation

• Transportation refers to the movement of

everything from raw material to finished
goods between different facilities in a supply
chain.
• The trade-off here is manifested in the
choice of transport mode.

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Modes of transportation decisions

• Fast modes of transport such as airplanes are very

responsive but also more costly.
• Slower modes such as ship and rail are very cost
efficient but not as responsive.
• Transportation decisions are very important because
transportation costs can be as much as a third of the
operating cost of a supply chain.

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Six basic modes of transport

There are six basic modes of transport that a company

can choose from:
• Ship
• Rail

• Pipelines
• Trucks
• Airplanes

• Electronic Transport

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Ship

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Ship

• Very cost efficient but also the slowest mode of

transport.
• It is limited to use between locations that are
situated next to navigable waterways and facilities
such as harbors and canals.

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Rail

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Rail

• Very cost efficient but can be slow.

• This mode is also restricted to use between locations

that are served by rail lines.

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Pipelines

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Pipelines

• Very efficient but are restricted to commodities

that are liquids or gases such as
• Water,
• Oil, and
• Natural gas.

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Trucks

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Trucks

• Relatively quick and very flexible mode of transport.

• Trucks can go almost anywhere.
• Cost is prone to fluctuations though, as the cost of
fuel fluctuates and the condition of roads varies.

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Airplanes

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Airplanes

• Very fast mode of transport and are very

responsive.
• Most expensive mode and it is somewhat limited
by the availability of appropriate airport
facilities.

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Electronic transport

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Electronic transport

• The fastest mode of transport and it is very flexible

and cost efficient.
• It can 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.

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Routes for Transportation

• Given these different modes of transportation and

the location of the facilities in a supply chain,
managers need to design routes and networks for
moving products.
• A route is the path through which products move
and networks are composed of the collection of the
paths and facilities connected by those paths.

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Responsiveness vs efficiency of transportation

• As a general rule, the higher the value of a product

(such as electronic components or pharmaceuticals),
the more its transport network should emphasize
responsiveness and
• The lower the value of a product (such as bulk
commodities like grain or lumber), the more its
network should emphasize efficiency.

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F. Information

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F. Information
• Information is the basis upon which to make decisions
regarding the other four supply chain drivers.
• Information is the connection between all of the
activities and operations in a supply chain.
• Accurate timely and complete information helps each
company in a supply chain to make good decisions for
their own operations and maximize the profitability of
the supply chain as a whole.

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Purpose of information sharing

• Information is used for purposes in any supply chain:

• Coordinating daily activities related to the functioning

of the other four supply chain drivers: production;
inventory; location; and transportation.
• To decide on weekly production schedules, inventory
levels, transportation routes, and stocking locations.

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Purpose of information sharing

• Forecasting and planning to anticipate and meet

future demands, to set monthly and quarterly
production schedules and
• Timetables, and guide decisions about whether to
build new facilities, enter a new market, or exit
an existing market.

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Information sharing trade-off

• Within an individual company the trade-off here is

weighing the benefits that good information can
provide against the cost of acquiring that information.
• Within the supply chain as a whole, the trade-off
that is deciding how much information to share with
the other companies and how much information to
keep private.

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Increased information sharing

• Increased information sharing (e.g. information about

product supply, customer demand, market forecasts,
and production schedules) can increase responsive of
everyone in a supply chain.
• The potential costs associated with increased
competition can hurt the profitability of a company.

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11. Flows in a Supply Chain

Information

Product
Customer
Funds

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Process View of a Supply Chain

• Push/pull view: processes in a supply chain are

divided into two categories depending on whether
they are executed
• in response to a customer order (pull- after
order arrival) or
• in anticipation of a customer order (push-
before order arrival)

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Process View of a Supply Chain

• Up-Stream / Down Steam Processes :

• Processes between Producer and Supply Side
(Supplier)
• Processes between Producer and Market
(Distributor, Retailor, customers)

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Cycle View of a Supply Chain

• Each cycle occurs at the interface between two

successive stages
• Customer order cycle (customer-retailer)
• Replenishment cycle (retailer-distributor)
• Manufacturing cycle (distributor-manufacturer)
• Procurement cycle (manufacturer-supplier)

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Cycle View of a Supply Chain

• Cycle view clearly defines processes involved and

the owners of each process.
• Specifies the roles and responsibilities of each
member and the desired outcome of each process.

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Push/Pull View of Supply Chain Processes

• Supply chain processes fall into one of two

categories depending on the timing of their
execution relative to customer demand
• Pull: execution is initiated in response to a customer
order (reactive)
• Push: execution is initiated in anticipation of
customer orders (speculative)

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Push/Pull View of Supply Chain Processes

• Push/pull boundary separates push processes

from pull processes
• Useful in considering strategic decisions
relating to supply chain design – more global
view of how supply chain processes relate to
customer orders

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Push/Pull View of Supply Chain Processes

• Can combine the push/pull and cycle views

• The relative proportion of push and pull
processes can have an impact on supply
chain performance

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Supply Chain Macro Processes in a Firm

• Supply chain processes discussed in the two

views can be classified into:
 Customer Relationship Management
(CRM)
 Internal Supply Chain Management
(ISCM)
 Supplier Relationship Management (SRM)

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Supply Chain Macro Processes in a Firm

• Integration among the above three macro

processes is critical for effective and
successful supply chain management

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