Examination of the need for and management of the supply chain

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1. Introduction to supply Chain Management

What is a supply chain? What is supply chain management (SCM)? Importance of supply chain management, Overview of supply chain management, Decision phases in a supply chain, Process view of a supply chain, Nature and scope of supply chain management, Managing the supply chain, A model of supply chain management, What is logistics?, What is logistics management?, Logistical competency, Competitiveness and competitive advantage, Gaining competitive advantage through logistics, Integrated supply chains, Supply chain and competitive performance, Evolution of logistics toward supply chain management, Logistical activities, Objectives of logistics management, Role of logistics in (a) supply chain management, (b) the economy and (c) the organization, Logistics costs, Total cost concept, Evolution of supply chain management, Importance of logistics / supply chain management, Focus areas in supply chain management, A frame for structuring supply chain drivers, Change drivers, Review questions.

A company can identify its supply chain by first selecting a particular product group or product family. Then it should trace the flow of materials and information from the final customer (end users) backward through the distribution system, to the manufacturer and then to the suppliers and the source of raw materials. This entire chain of activities and process is known as the supply chain for that product group.

A large company will have several supply chains. In a multi-divisional company with many product groups, there could be many different supply chains. For example, large companies such as Procter and Gamble or General Electric may use 50 to 100 different supply chains to bring their products to the market. There has been a great deal of interest recently in industry and academic in the subject of supply chain management.

A company can identify its supply chain by first selecting a particular group of product family. Then it should trace the flow of materials and information from the final customer (end users) backward through the distribution system, to the manufacturer and then to the suppliers and the source of raw materials. This entire chain of activities and process is referred to s the supply chain for that product group or product family.

A large company will have several supply chains. In a multi-divisional company with many product groups, there could be many different supply chains. For example, companies such as General electric or Procter and Gamble may use 50 to 100 different supply chains to bring their products to the market. Exhibit 1.2 illustrates the stages of a detergent supply chain.

2. Important of Supply chain Management

Of late, supply chain management is gaining growing importance because of the following reasons :

The total time for materials to travels through the entire supply chain can be quite long (say 6 months to one year or more). 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.

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.

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.

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 optimization.

The design, planning and operation of a supply chain have a strong impact on overall profitability and success.

Supply-chain management has become a hot competitive advantage as companies struggle to get the right stuff to the right place at the right time.

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.

Supply chain management includes transportation vendor, suppliers, distributors, banks, credit and cash transfers, bills payable and receivable, warehousing and inventory levels, order fulfillment and sharing customer, forecasting and production information.

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.

Supply chain management builds a chain of suppliers that focus on both minimizing waste and maximizing 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.

3. Supply Chains :

A supply chain consists of all stages involved, directly or indirectly, in fulfilling a customer's request. It not only includes the manufacturer and suppliers, but also transporters, warehouses, retailers and customers themselves. Within a manufacturing organization, the supply chain includes functions such as new product development, marketing, operations, distribution, finance and customer service.

A supply chain is dynamic and involves the constant flow of information, product and funds between different stages. Each stage of the supply chain performs different processes and interacts with other stages of the supply chain. The primary purpose of the existence of any supply chain is to satisfy customer needs; in the process of generating profits for itself. Supply chain activities begin with a customer order and end when a satisfied customer has paid for his or her purchase. It is not necessary that only one player is involved at each stage of the supply chain. A manufacturer may receive material from several suppliers and then supply to several distributors. Therefore, most supply chains are actually networks and may be called as supply networks or supply webs describe the structure of supply chains.

A typical supply chain may involve the following stages:

- Customers

- Retailers

- Wholesalers / Distributors

- Manufacturers and

- Component / raw material suppliers.

3.1 Objective of a Supply Chain : The objectives are :

To maximize the overall value generated. The value a supply chain generates is the difference between what final product is worth to the customer and the effort the supply chain expends in filling the customer's request.

To achieve maximum supply chain profitability. Supply chain profitability is the total profit to be shared across all supply chain stages.

To reduce the supply chain costs to the minimum possible level.

Supply chain management involves the management of flows between and among stages in a supply chain to maximize total profitability.

3.2 Decision Phases in a Supply Chain

The three decision phases in a supply chain are :

Supply chain strategy or design

Supply chain planning and

Supply chain operation

These three phases are briefly described in the following section.

Supply Chain Strategy or Design : The company decides how to structure the supply chain during this phase. The Chain's configuration and the processes each stage will perform are decided. Strategic or long-range decisions made by companies include (i) The location and capacities of production and warehousing facilities, (ii) Products to be manufactured or stored at various locations, (iii) Modes of transportation to be made available along different shipping legs and (iv) Type of information system to be utilized. The company's strategic objectives must be supported by its supply chain configuration. For instance, a company's decisions regarding the location and capacity of its manufacturing facilities, warehouses and supply sources are all supply chain design or strategic decisions. Since these decisions are made for the long term, they are very expensive to be changed in the short term. Hence companies need to take into account uncertainty in anticipated market conditions over the next few year before they make supply chain design decisions.

Supply Chain Planning : In this phase, companies define a set of operating policies that govern short-term operations. The configuration of supply chain determined in the previous phase establishes constraints within which planning must be carried out. The planning phase starts with a forecast for the coming year of demand in different markets. Supply chain planning includes decisions regarding the following:

Which market to be served from which locations.

The planned build up of inventories.

The subcontracting of manufacturing

The replacement and inventory policies to be followed.

Policies regarding back up locations in case of a stock out and

The timing and size of marketing promotions.

Planning establishes parameters within which a supply chain will function over a specified period of time. However it must be ensured that planning decisions consider the uncertainty in demand, exchange rates and competition over the planning horizon.

Supply Chain Operations : During this phase, companies make decisions for the time horizon (weekly or daily) regarding individual customer orders. At this stage. The supply chain configuration is fixed and the planning policies already defined. The supply chain operation aims at implementing the operating policies in the best possible manner. Various activities involved in this phase are : (i) Allocating individual orders to inventory or production, (ii) Setting dates for fulfilling orders, (iii) Generating pick lists at a warehouse, (iv) Allocating an order to a particular shipping mode or shipment, (v) Getting delivery schedules of trucks and (vi) Placing replenishment orders. Because operational decisions are made in the short term, there is often less uncertainty about demand information.

The design, planning and operation of a supply chain strongly affect the overall profitability and success of a firm.

4. Process view of Supply Chain

Two different ways to view the process performed in a supply chain are.

1. Cycle view 2. The push-pull view

1. Cycle View : According to this view the processes in a supply chain are divided into a series of cycles, each performed at the interface between two successive stages of a supply chain. All supply chain processes can be broken down into the following four process cycles :

(a) Customer order cycle, (b) Replacement cycle, (c) Manufacturing cycle and (d) Procurement cycle.

Each cycle occurs at the interface between two successive stages of the supply chain. Exhibit 1.3 illustrates the four cycles and five supply chain stages.

The four process cycles in the supply chain are briefly discussed in the following section :

(i) Customer Order Cycle : This occurs at the customer / retailer interface and include customer arrival, customer order entry, customer order fulfillments and customer order receiving.

Customer arrival refers to the customers visiting the location (Supermarket or retail store) where he or she has access to his or her choices and make a decision regarding what to buy, how much to buy and so on.

Customer order entry refers to customers telling the retailer what products they want to buy and the retailer allocating those products to customers.

Customer order fulfillment refers to process by which the customer order is filled and sent to the customer.

Customer order receiving refers to process by which customer receives what he has ordered and takes ownership of the products ordered.

(ii) Replenishment Cycle : This occurs at the retailer / distributor interface nd includes all processes involved in replenishing inventory f the retailer. The processes involved in the replenishment cycle include : Retail order trigger, Retailer order entry, Retail order fulfillment and Retailer order receiving.

Retail order Trigger : As and when the retailer fills customer order, inventory is depleted which must be replenished to meet future demand. The retailer devises a replenishment or ordering policy which triggers an order on the distributor so as to maximize profitability by balancing product availability and cost.

Retail Order Entry : The retailer places the order with the distributor or manufacturer. The purpose of the retail entry process is to ensure that an order is entered accurately and conveyed quickly to all supply chain processes affected by the order.

Retail Order Fulfillment : This is a process by which retail order is filled by the distributor or manufacturer. The objective is to get the replenishment order to the retailer on time while minimizing costs.

Retail Order Receiving : When the replenishment order arrives at a retailer, the retailer must receive it physically, update all inventory records and settle all product from distributor to the retailer as well as information and financial flows. This process helps to update inventories and displays quickly at the lowest possible cost.

(iii) Manufacturing Cycle : This occurs at the distributor / manufacturer interface and includes all posses involved in replenishing distributor (or retailer) inventory. The process involved in the manufacturing cycle include (a) Order arrival from the distributor, retailer or customer (b) Production scheduling, (c) Manufacturing and shipping and (d) Receiving at the distributor, retailer or customer.

(iv) Procurement Cycle : This occurs at the manufacturer / supplier interface and includes all process necessary to ensure that materials are available for carrying out manufacturing as per the schedule. The manufacturer orders components from suppliers to replenish inventories. Component orders are based on the production schedule.

2. Push / Pull View of Supply Chain Process : All process in the supply chain fall into one of two categories : (i) Push processes and (ii) Pull processes. In pull processes, execution is initiated in response to a customer order. In push processes, execution is in anticipation of customer order. At the time of execution of a pull process, demand is known with certainty whereas at the time of execution of a push process demand is not known but forecasted.

A Push / Pull view of the supply chain is useful when considering strategic decision relating to supply chain design. This view facilities a more global consideration of supply chain processes as they relate to a customer order. Pull processes may be regarded as reactive processes because they react to customer demand. Push processes may be regarded as speculative processes because they respond to forecast (speculative) demand rather than actual demand.

The Push / Pull boundary in a supply chain helps to separate, push processes from pull processes. For example, in a computer manufacturing company manufacturing personal computers the beginning of assembly process represents the push/pull boundary. All processes carried out prior to assembly are push processes and all processes carried out after and including assembly are pull processes because they are initiated in response to a customer order.

5. Managing The Supply Chain

Because supply chain management deals with the complete cycle of materials as they flow from suppliers to production to warehousing to distribution to the customer, there are many opportunities to enhance value. Some of these opportunities are :

(i) Postponement : Postponement means delaying any modification or customization to the product as long as possible in the production process. For example, Hewlett-Packard (HP) examined the supply chain for its printer itself and into its power cord. Because of this, HP modified the printer, its power cord, its packaging and its documentation so that only the power cord and documentation needed to be added at the final distribution point. This modification allowed the firm to manufacture and hold centralized inventories of the basic printer for shipment as demand changed only the unique power system and documentation to be held in each country. This understanding of the entire supply chain reduced both risk and investment in inventory.

(ii) Channel Assembly : Channel assembly is a variation of postponement. It sends individual components and modules, rather than finished products to the distributor. The distributor then assembles, tests and ships the product to the customers. Channel assembly treats distributors more as manufacturing partners than as distributors. With this strategy, finished goods inventory is reduced because units are built to a shorter, more accurate forecast. Many personal computer manufactures such as Dell, IBM, HP and Compaq have successfully demonstrated the low-cost and rapid-response advantages of the channel assembly.

(iii) Drop Shipping and Special Packaging : Drop shipping means the supplier will ship directly to the end consumer, rather than to the seller, saving both time and shipping costs. Other cost saving measures include the use of special packaging, labels and optimal placement of labels and bar codes on containers.

(iv) Blanket Orders : A blanket order is a contract to purchase certain items from a vendor. It is not authorization to ship anyting. Shipment environment, there is typically one supplier for all units of a particular product. Payment is made to the units supplied by the supplier without a formal request by the supplier for payment.

(v) Invoiceless Purchasing : Invoiceless purchasing is an extension of good purchaser - supplier relations. In an invoiceless purchasing environment, there is typically one supplier for all units of a particular product. Payment is made to the units supplied by the supplier without a formal request by the supplier for payment.

(vi) Electronic Ordering and Funds Transfer : Transactions between firms are increasingly done via electronic data interchange (EDI) which is a standardized data transmittal format for computerized communications between organizations.

(vii) Stockless Purchasing : Stockless purchasing means that the suppliers maintain inventory that is delivered directly to the purchaser's using department rather than to a store for stocking and using later.

(viii) Standardization : Standardisation means reducing the number of varieties in materials and components as an aid to cost reduction.

(ix) Other Techniques : Under the umbrella of supply-chain management, a variety of techniques are included. They are :

establishing lines of credit for suppliers

reducing the time money is in transit

co-ordinating production and shipping schedules with suppliers and distributors,

sharing market research information and

making optimal use of warehouse space.