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Conceptual Model Of Supply Chain Management Business Essay

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Published: Mon, 5 Dec 2016

During the early twentieth Century the concept of mass production prevailed. Henry Fords assembly line had the concept of making every component ,sub-assembly and the final assembly under one roof . This resulted in the mass manufacture of the Ford T Model black car which was sold in very large numbers by Fords dealers from their various outlets. A customer could walk- in and buy the car which was available in plenty at the dealers outlet at all times

With the passage of time, Alfred Sloan of General Motors developed the concept of introducing more than one type of automobile. He offered variety of cars to suit the pocket of every customer. With product variety becoming the philosophy it became necessary for General Motors to buy components and certain subassemblies from outside suppliers. This was the beginning of the concept of Outsourcing some parts from the outside suppliers.

Now, there were three independent entities involved in the manufacture and distribution of an automobile:

(1 ) The Supplier ( 2) the main manufacturer and (3) The dealer, who was responsible for supplying the automobile to the ultimate customer. This was the early beginning of the Supply Chain in its rudimentary form. However, it was not a seamlessly integrated supply chain. The three members of the early chain did not have trust in each other. There existed rigid walls of mistrust between the three members of the rudimentary chain. To be successful, all the members of this chain had to be integrated as business partners. It became imperative that each of the members of this chain made profit through value addition along the supply chain. The customer of today looks forward to a value- added product instead of just a product at low cost ,acceptable quality and on- time -delivery.

Customer focus in todays scenario:

Todays customer has become extremely choosy and, knowledgable His emphasis and preference has gradually shifted from On time delivery to Cost effectiveness to Superior quality and better service to ultimately upon Value for money. The customer of present times is much more value conscious than the customer of 50 years ago .The capability required for market entry by any firm and maintaining leadership has changed from just the ability to supply to ability to add more and more value to the customer At this juncture it is desirable to define what value is? Simply stated ,value is analogous to Utility which means different things to different customers .Value could mean certain desirable quality characteristics like aesthetics, ergonomic comfort ,low cost ,high level of performance and many such desirable attributes bundled together. Products in modern times need to be customized to achieve total customer satisfaction. This situation can be regarded as the basic cause of the evolution of Modern Supply Chain wherein specialized , high tech components and subassemblies have got to be outsourced from suppliers who become trading partners of the main manufacturer

It can be seen that effective final product or customer service is not achieved solely by motivated and customer oriented employees but through the supply chain that enables a consistent delivery of service through the reaching of right products, at the right time, at the right cost, of the right quality to the right customer. Hence, it has become imperative for organizations to see supply chain as part of its overall strategy. The companies, which have achieved success in this process, have already found themselves in a drivers seat vis-A¿½-vis the other companies, which did not realize its importance earlier. At this point it should be noted that a final product is not achieved by doing all the manufacturing under one roof as in the times of Henry Ford. A Supply chain entails purchasing and outsourcing of a very large percentage of components and sub assemblies from outside sources who form the important partners of the Supply Chain. One firm cannot claim to be core- competent in producing a large variety of components which go into the final product that is marketed by a firm to its customer. A Supply chain comprising of a large number of raw material, components and sub-assemblies as inputs is a must to meet the quality and quantity demanded by todays sophisticated customer.


Referring to Fig 30.1 a Supply chain acts as a connecting chain of materials from the suppliers S to the manufacturer to the distributor to the retailer R to the ultimate customers .In a supply chain the flow of demand information is in a direction opposite to the flow of materials .Thus, the information flow on demand is from the customer to the retailer to the distributor to the manufacturer to the supplier .It may be noted that the supply chain is not a linear chain but takes the form of a network. It consists of a network of facilities and distribution options that perform the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers in the right time and of the right quantity and quality .The figure 30.1 highlights one more aspect of a complete supply chain which the reader should note The complete SCM has three sections at the macro level( 1)Supply Relationship Management: The segment of the chain which is concerned with the supply of raw materials ,components and sub-assemblies .This segment is called the SRM which plays the role of supplier relations. (2) The Conversion system within a factory which is done by the production and operations management function. This macro system is often called the Internal Supply Chain Management or ISCM.(3) CRM or customer relations management macro system.The CRM Sytem takes care of the market,Selling,Call centre and order management. The management of the three macro level systems have been very efficiently taken care by leading software corporations like the SAP. ,Oracle ,BAAN and other Enterprise Resource Planning Systems. Since the Customer Relationship management is focused towards the marketing ,Sales and service it is discussed in the next chapter 31 in some detail.

Supply chain management can be seen as the process of strategically managing the procurement, movement and storage of materials, parts and finished inventory and related information flows through the organization and its marketing channels in such a way that current and future profitability are maximized through the cost effective fulfillment of orders.

Defining Supply Chain: According to APICS (American Production and Inventory Control Society) Dictionary,” Supply is understood as the quantity of goods available for use or the actual (or planned) replenishment of a product (or component). The replenishment quantities are created in response to a demand for the product r in anticipation of such a demand. Supply chain is understood as the process starting from the procurement of raw materials to the ultimate consumption of the finished product linking across supplier-user companies, or the functions inside and outside a company that enable that value chain to make products and provide services to the customer. Supply chain management means planning, organizing and controlling of supply chain activities. In a nutshell it means from the customer to the customer.”

The term supply chain refers to all the activities involved in supplying an end user with a product or service. The perception of each organization that is involved – the ore refiners, the transporters, the component producers, the manufacturer, the whole-seller, the retailers, and the customer – being a link in the process makes the analogy of a chain is quite appropriate. However, it must be remembered that it is not just goods that are flowing along the chain but also information, funds, paper, people, and other such items and these items are flowing in both directions along the chain. In addition the green revolution encourages recycling, recovery, and reuse of products so even the used product may be flowing back up the chain. Moreover, the supply chain also involves other functional areas and activities such as product/service design, finance, accounting, marketing, human resources, engineering, and so on. Thus, instead of a chain, we should probably think of the supply process as more of a network, with everyone communicating with, and passing monies and items between everyone else.

Supply chain management (SCM), thus , is the process of trying to appropriately manage this network of activities and flows. More formal definitions of SCM include the following points:

SCM coordinates and integrates all the supply chain activities into a seamless process and links all of the partners in the chain, including departments within an organization as well as the external suppliers, transporters, third-party companies, and information system providers.

SCM enables manufacturers to actively plan and collaborate across a distributed supply chain, to ensure that all parties are aware of commitments and schedules. By actively collaborating as a virtual corporation, manufacturers and their suppliers can source, produce, and deliver products with minimal lead time and expense.

The goal of SCM is to optimally deliver the right product to the right place at the right time, while yielding the greatest possible profit.

Supply chains exist in both service and manufacturing organizations, although the complexity of the chain may differ greatly from industry to industry and firm to firm.

Using modern IT system Multi-tier partnerships


Customization Non – Core outsourcing

Third or Fourth party Logistics

Figure 30.2: Conceptual model of SCM

In sum , we can say that SCM works in a demand driven situation, encourages flow-type production with small batches, reduces idle inventory and idle time in any business by improving overall customer- centric approach.

Figure 30.2 shows the conceptual model of SCM. It is based on the five basic elements called Pillars of SCM. It includes:

Customization philosophy

Outsourcing of items in which the supplier has competency

Multi-tier supplier partnership

Third or Fourth party logistics

Use of modern IT systems


After the First Industrial Revolution most of the firms were following factory system which was acceptable at that time but with a rudimentary supply chain approach.Even within a factory every department was an isolated island and either formal or hostile relationships were observed amongst other trading organizations like suppliers, manufacturers, dealers etc. This could be represented by an equation: Old supply chain system=[Suppliers]+[Manufacturers]+[Dealers]+[Suspicion or Lack of trust] The scenario started changing only after the Second Industrial Revolution took place. The same theme was accelerated with the advent of MRP systems, MRP-2 systems and finally ERP systems. The origination started evolving as one entity and internal supply chains started becoming stronger. In fact the key deliverables expected from ERP system was the tightly integrated internal organization . The relationships between the trading organizations were improving which was referred to as partnership. This evolution ultimately resulted into the modern Awtar of supply chain management. Thus the concept of supply chain did exist long back but managing it strategically is a recent phenomenon.

As discussed above, SCM function is the outgrowth of the unified evolution of manufacturing management and logistics management functions. The concept logistics management itself evolved from unified evolution of materials management and sales and distribution management. An equation as given below can well explain the SCM in its modern form and its relationship with manufacturing and logistics coupled with mutual trust:

Modern SCM= Manufacturing +[ Inbound Logistics +Outbound Logistics]+Mutual trust = [Manufacturing] +[Logistics]+ Mutual trust and CRM

30.4 Stepwise Process of Developing Integrated Supply Chains:

Conflicting Objectives :The whole process of SCM requires cross-functional coordination efforts, which are required to balance conflicting objectives. Of various objectives avan in one firm

The marketing department, on the basis of market research and sales force feedback, forecasts the market size and potential for the present year and carries out the the forecast, or confirmed customer orders. This information is passed on to production planning department, to work out production schedules for machines and men and concurrently, to decide the priority of the job depending upon priority ,machine capacity utilization constraint

The role of purchasing enters the picture to coordinate the timely supply of raw materials and sub-assemblies. At this time, the marketing department will be interested to know the current and forthcoming schedules and also the production capabilities while processing the order to commit to realistic delivery dates with customers. The role of accounting starts from billing and payment. Problems arise if the priorities change and something unexpected happens, e.g. new developments in the market, strike, natural calamities, or sudden change in government policy etc.

Then, if adaptation is not proper, the situation may deteriorate, affecting the image of the company, overall goodwill and loss of business. Further, it is seen that policies, practices and priorities of different departments are to maximize their objectives at the cost of overall company objectives . For example, marketing would like to keep inventories high so that goods are always available to customer i.e. better customer service. Finance department would be interested to maintain low cost of working capital in the firm so it would like to minimize investment on inventory. Thus the marketing departments objectives of keeping high finished inventory clashes with the finance department. The objective of keeping a low level of finished inventory clash with the objectives of logistics department, which would prefer the shipment of the largest possible quantities to minimize transportation costs and hence, wish to wait till a large inventory, is built-up. Warehouse, on the other hand, would like to have low inventory or low investment in space. These are typical functional role conflicts which make integration in the supply chain a tough job

Integration needed to develop a Supply Chain:

Successful supply-chain management requires a high degree of functional and organizational integration. Such integration doesnt happen easily owing to the conflicting objectives mentioned earlier. Typically, firms willing to solve the problem of developing integrated supply chains have to progress through a series of phases, as Fig. 11.6 shows. In phase 1, a starting point for most firms, external suppliers and customers are considered to be outsiders ,independent of the firm. Relations with these firms are at a formal level, and there is minimal sharing of operating information and costs .Even internally, purchasing, production control, and distribution act independently, each optimizing its own activities without considering the other departments as explained in the conflicting objectives section discussed earlier. Each external and internal entity in the supply chain controls its own inventories, and often utilizes control systems and procedures that are incompatible with those of other entities. Because of organizational and functional boundaries, large amounts of inventory exists in the supply chain and the overall flow of materials and services is ineffective.

In phase 2 the firm initiates internal coordination by combining purchasing, production control, and distribution into an integrated materials management department.




Production control

PurchasingPhase 1: independent supply-chain entities

Internal supply chain Materials management department


Suppliers Phase 2: Internal integration


Production control


Phase 3: Supply-chain integration

Integrated supply chain



Internal supply chain

Fig 30.3 Formation of Integrated supply Chain

The focus is on the integration of those aspects of the supply chain directly under the manufacturing firms control to create an internal supply chain. Firms in this phase utilize a seamless information and materials control system from distribution to purchasing, integrating marketing, finance, accounting, and operations. Efficiency and electronic linkages to customers and suppliers are established. However, its suppliers and customers are still treated as independent entities .Internal integration should be achieved and stabilized before focusing upon Phase 3, external Integration

Phase 3

In phase 3, External integration, the internal supply chain is extended to include suppliers and customers as connected channel members thereby linking them to the external supply chain, which is not under the direct control of the firm. The firm, now being an important entity of the total supply chain must change its focus from a product or service orientation to a customer orientation. This new focus means that the firm must decide the right priorities for each of its market segments. For its industrial customers, the firm must develop a better understanding of their products, culture, markets, and organization. Instead of merely reacting to customer demand, the firm should now attempt to work with its customers so that both benefit from improved flows of materials and services. Likewise, the firm must develop better understanding of its suppliers organizations, capacities, and strengths and weaknesses-and include its suppliers earlier in the design process for new products or services. Phase 3 represents what is called a true supply-chain management and seeks to integrate the internal and external supply chains.

The SCM objective of attempting to manage activities that lie outside a managers normal domain of responsibility is to reduce the costs of delivering a product or service to a user and improve its value in terms of quality, functionality, and timeliness. Attempts tocut down the costs of purchasing have been traditionally going on for decades, and we see heavy emphasis on it even today. However, management has also realized that there are other costs in the supply chain that can be reduced with better information sharing and tighter management, and these costs are the ones which now take the front seat in supply chain management. For example, costs of multiple shipments, costs of poor quality, costs of late delivery – these are all costs that can be eliminated with better information sharing and managerial wisdom

Until recently, firms primarily focused essentially on managing their immediate suppliers. For example, Toyota is known for training their suppliers how to install and operate their Just- In-Time system or lean manufacturing. But the training does not stop there . Toyotas immediate first tier suppliers can gain added advantage by training their suppliers, the second tier, and so on .


Supply Chain is the current trend in manufacturing .One firm can be said as superior to another if it has a better Supply chain than another firm. The bedrock of supply chains is mutual trust between the members of a chain. There must be a very good collaboration between members of the supply chain members. The members of the chain should think in terms of total value addition to the supply chain instead of just the profits of few dominant channel members which put other members at a loss. The sharing of information regarding demand data should be transparent across the chain .Use should be made of the latest IT tools to access information which should be shared by the members. The ultimate objective should be to serve the ultimate customer to achieve his loyalty and confidence

Supply chain is not just a tactics but a full fledged strategy based on collaboration , demand information sharing, customer service strategy and technology integration strategy as depicted in figure.30.5

Demand flow information

Collaboration strategy

Customer service strategy

Supply chain strategy framework

Technology integration strategy

Figure30.4 : Supply chain strategy framework.

Opportunities for collaboration among business partners will vary depending upon the organizations perspective role in the supply chain. The three main types of collaboration are as follows:


1 Supplier Collaboration: Suppliers are the most important channel members. The manufacturer should have great trust in the supplier .He should not only be involved in supplying the right materials at right time but should be involved in the Product design process during concurrent design stage. Vendor managed Inventory and JIT 2 are the latest developments wherein the supplier is made the custodian who is given access by the manufacturer within his plant to advise on how much material should be stored by the manufacturer.

2 Customer Collaboration: In certain situations the manufacturer can take a feedback from the customer regarding demand planning and inventory replenishment. This approach ensures that the customer requirements are met efficiently.

3 Collaboration with Third Party Logistics Providers: the collaboration of companies with 3rd party logistics providers focuses on jointly planning logistics activities. It also gives the company the added advantage of better packaging which is an area of expertise of the logistics providers. .


Traditionally, in supply chain management, the key focus and scope has been in managing flow of goods from suppliers through the manufacturing and distribution chain to the customer. The key in demand management is the continuous flow of demand information from customer and end users through distribution and manufacturing to suppliers. Customers could be sometimes unpredictable but then a good demand flow strategy enables the company to simplify their supply chain operations. This is made possible through use of modern ITtools


Customer satisfaction level is directly proportional to the service provided by the company.

Good customer service is based on four Ps: Product/Service, Physical evidence ,People and Process

Customer Segmenting: a company has to strategically decide on the segments it wants to target for various commodities. It has been found that most of the successful companies serve more than one product variety.

Cost of Service: It is important to obtain an objective estimate of whether the things that the customers want are affordable to the company. The kind of support needed from the suppliers or other parties in the supply chain has to be determined in advance.

Profitability management: Determination of the appropriate response to the identified needs and expectations of each customer segment must be completed. In short, the response which maximizes the firms profitability and growth should be determined. Response is a function of type of product and its stage in the product life cycle .This aspect has bee discussed in the section on design of supply chains i.e. whether they are to be efficient or Responsive


Developments in IT has enabled the integration of business information systems,. A number of IT-based supply chain information management tools are now available to provide intelligent decision support and execution management .For example, use of special Sales Automation Tools is essential to create effective Customer Relationship Management .

30.7 LOGISTICS IN SUPPLY-CHAIN MANAGEMENT : There are three components of Logistics

1 PURCHASING INVOLVING IN- BOUND- LOGISTICS: Purchasing is the management of the acquisition process, which includes deciding which suppliers to use, negotiating contracts, and deciding whether to buy locally. Purchasing must satisfy the firms long-term supply needs and support the firms capabilities to produce goods and services. This task is crucial for any organization, whether it be a retailer, service provider, or manufacturer. It is an ideal situation to have a certified supplier .A certified supplier is one who has past experience with the firm.He knows the firms requirement so well that he will be permitted to download the demanded parts directly on the production line .There is no need to get the parts inspected prior to bringing them on the assembly line .However, in other cases a systematic acquisition procedure has to be followed as outlined in chapter on purchasing. It is outlined once again in brief

The Acquisition Process

The acquisition process involves five basic steps:

Recognize a need. The process begins when purchasing receives a request to buy outside materials or services. The request (called a purchase requisition) includes the items description, quantity and quality desired, and desired delivery date. At a manufacturing firm the purchasing department normally receives authority to buy from the production control department.

Select suppliers. This step involves identifying suppliers capable of providing the items, grouping items that can be provided by the same supplier, requesting bids on the needed items, evaluating the bids in terms of multiple criteria, and selecting a supplier. When a long-term contract has already been set up for an item, this step isnt necessary.

Place the order. The ordering procedure can be complex and time-consuming, as with expensive one-time purchases, or as simple as a phone call for a standard item routinely ordered from the same supplier. In some high-usage situations the supplier makes ship0ments daily or even shift by shift without being prompted by purchase orders. Many firms are now linked by computer to suppliers, simplifying the ordering process even more.

Track the order. Tracking includes routine follow-up of orders to avoid late deliveries or deviations from requested order quantities. Suppliers are contracted by letter, fax, telephone, or e-mail. Follow-up is particularly important for large purchases when a delay could disrupt production schedules or mean the loss of customer goodwill and future sales.

Receive the order. Incoming shipments often must be checked for quantity and quality, with notices going to purchasing, the unit placing the purchase requisition, inventory control, and accounting. If the shipment isnt satisfactory, purchasing must decide whether to return it to the supplier. Records on punctuality, quality purchasing must coordinate closely with accounting to ensure that suppliers are paid accurately and on time.


A special case of the cooperative orientation is outsourcing . The decision to outsource an activity, sometimes referred to as the make-or-buy decision, has implications for supply-chain management because it affects the number of activities under the direct control of the firm in its internal supply chain. This decision is not trivial because a firm must first have a clear understanding of its core competencies and retain them. Outsourcing has direct relevance fro supply-chain management because of its implications for control and flexibility.

Flexibility to Change the Supply Chain. A firm has a more flexible arrangement with a supplier if it has a short-term agreement with it. The firm can choose to renegotiate the terms of the contract or change suppliers frequently. These options arent available if the firm enters into ling-term arrangements with a supplier. If market needs change, or the supplier experiences business difficulties, the firm will have a more difficult time changing suppliers if it has a long-term commitment.

2 Manufacturing Planning within the factory : This is concerned with material handling and movement within the factory. This is concerned with Manufacturing and comes within the domain of the conversion process within the factory. The manufacturing planning in our country is carried with the help of the well known MRP which was developed in the USA sometime in the 1960 s with an initiative taken by Joseph Orlicky. As is well known ,the MRP process breaks the final assembly into its modules and components and determines their requirements at various levels and points in time .It works backwards in time and identifies the right batch quantities of each of these components and their subassemblies so that the final assembly is delivered exactly in right quantities at the right time schedule. Details of the working of MRP are discussed in Chapter of this book.

While MRP is known as a Push method ,the Japanese, based on an initiative by Taichi Ohno of the Toyota company have developed a method of manufacturing well known as the JIT System. In the JIT System the needed parts are pulled to the final assembly end with the help of Kanban cards which act as a signal to the upstream operation to produce just the quantity of the batch of parts pulled by the Kanban card downstream. This process of pulling the parts just when needed and in right quantity results in a minimal Inventory situation and a smooth streamlined flow of materials is created between the workstations.JIT production approach is called the Pull approach. Kanban has become very popular in US and even Indian companies like the Birla Group are impressed by it. .


Whereas purchasing deals with the inbound flow of materials, distribution deals with the outbound flow of materials. Distribution is the management of the flow of materials from manufacturers to customers and from warehouses to retailers, involving the storage and transportation of products. Distribution broadens the marketplace for a firm, adding time and place value to its products. Here, we briefly consider three types of decisions that distribution managers facet where to stock finished goods; what transportation mode to use; and how to schedule, route, and select carriers.


A fundamental decision is where to stock an inventory of finished goods. Forward placement means locating stock closer to customers at a warehouse or distribution center (DC) or with a wholesaler or retailer. Forward placement can have two advantages – fast delivery times and reduced transportation costs – that can stimulate sales. Firms using a make – to – stock strategy often use forward placement.

Finding the best way to position inventory is particularly important for international operations. Firms from around the world are trying to openDC( distribution centres) in strategic cities to support their sales activities at the International level. Placing inventory close to the customer reduces the lag time between receiving an order and delivering a product, an important competitive advantage in both domestic and international markets. Forward placement might also reduce

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