BASICS OF SUPPLY CHAIN MANAGEMENT

BUSINESS CONCEPTS

 Organizational Fundamentals

In any manufacturing company, material flow can be basically classified into three phases.
• Flow of raw material from suppliers into the manufacturing facility.
• Flow of material within the manufacturing facility as they are processed.
• Flow of finished goods from the manufacturing facility to the end customers.
To be responsive to the global competition, Organizations must be able to manage the complete flow of
material from the suppliers, through manufacturing, till the end product reaches the customers. Hence
organizations must be involved in the management of management of suppliers who provide direct and
indirect material inputs, must increase the manufacturing competitiveness and must effectively manage
the network of distribution systems responsible for delivery of the product to end customers. From this
realization emerged the concept of supply Chain.

Supply Chain: The supply chain encompasses all activities associated with the flow and transformation
of goods from the raw materials stage (extraction), through to end users, as well as the associated
information flows. Material and information flows both up and down the supply chain. The supply
chain includes new product development, systems management, operations and assembly, purchasing,
production scheduling, order processing, inventory management, transportation, warehousing, and
customer service. Supply chains are essentially a series of linked suppliers and customers; every
customer is in turn a supplier to the next downstream organization until a finished product reaches the
ultimate end user.

Supply Chain Management (SCM): SCM is the integration of all the activities in the supply chain to
achieve a sustainable competitive advantage. Supply Chain can be broadly classified of comprising of
three networks:
Supplier,
Firm and
Distribution.

The supplier network consists of all organizations that provide inputs, either directly or indirectly, to the
focal firm (i.e., the purchaser). Focal firms network is involved in the conversion of input material to the
output material. The distributive network consists of all downstream organizations from the focal firm
that ensure that the right quantity of goods is delivered to the appropriate customer location in a timely
manner.

Logistics: Logistics, also called as Physical distribution, focuses on the physical movement and storage
of goods and materials. Logistics is that part of the supply chain process that plans, implements, and
controls the efficient, effective forward and reverse flow and storage of goods, services, and related
information between the point of origin and the point of consumption.
Typical issues in logistics are evaluation of various transportation options, packaging options, inventory
management for different channels, develop and manage networks of warehouses when needed, and
manage the physical flow of materials into and out of the organization.Therefore, logistics is a subset in
the broader scope of SCM.

Elements of Supply Chain

Following are the key elements in Supply Chain Management:
• Customers
• Producers (includes Retailer, Distributor, Manufacturer)
• Suppliers
Customers, Producers and Suppliers can be interconnected in the Supply chain as follows:

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Interrelationship of the elements
• A number of companies can be linked in the supply chain network.
• A supplier to one manufacturing facility can be a customer to another manufacturing facility
and so on.. hence a number of supplier / customer relationships exist in the supply chain
network.
• A number of intermediaries (distributors, wholesalers, retailers etc.,) form part of the supply
chain network.
In defining the supply chain network and the integrations between the elements, the following decisions
must be made
• Identifying the key supply chain elements in the network to link the processes.
• Identifying the processes that are to be linked with the key elements.
• Identifying the level of integration and management control to be applied for each of the
processes

 Organizational Dynamics

Three phases in the evolution of SCM

Organizational structure from the fifties to the late eighties was marked by the functional silos where
the decisions were made keeping in mind the narrow view of the business functions and the
repercussions of the decisions on the other functions were ignored. These often created conflicting
objectives within the various functions of a company. The late eighties saw the advent of Business
Process Reengineering and ERP concepts. The corporate houses started analyzing the importance of
aligning their business with the developments in the information technology capabilities to collaborate
effectively with its stakeholders, integrate its functions and decision making and to remain competitive
in the market.

There are three distinct phases in evolution of SCM:

Pre-1970 era:
• Supply Chain was not considered as a competitive unit. Companies seek more profit by
maneuvering their suppliers and customers.
• Scientific methods like EOQ and SPC were applied.
• Companies attempted at Vertical integration – themselves.
1970 – 1980 era:
• Holding inventory becomes key due to Oil shock
• TQM and JIT practice becomes popular in Japan
• Distribution is not yet the focus area
• MRP systems gain popularity in US and Europe
Post 1980 era :
• Inventory profits dry up as inflation reigns in
• US manufacturers embrace JIT philosophy. JIT pushes inventory upstream.

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 • Lower setup times, lower batch quantities result in reduction in lead times and drastic
improvement in customer responsiveness.
• Suppliers and customers considered as part of the organization network. We against them
philosophy fades away.
• MRP systems give way to MRP II systems, ERP and then to advanced supply chain systems
involving optimization.

 Operating Environments

Business Process that connect various elements in SCM

1. Product Development
2. Order Fulfillment
3. Demand Management
4. Customer Relationship Management
1. Product Development Process :
As customer demands are ever increasing with respect to quality, delivery and options, organizations
are increasingly finding it difficult to meet the customer’s expectations. It is often noted that customers
want:
- Faster delivery
- Least price
- 0 % rejection rate
And as customer’s preference keeps changing, organizations are forced to reduce the product
development lead-time as well as costs. Organizations are increasingly employing the following
strategies in the Product Development Process:
• Integrate customers and suppliers early in the development process
• Reduce time to market
• Incorporate supply chain considerations into product design
• Employ Concurrent Product Development Practices

2. Order Fulfillment Process:

Organizations need to deploy appropriate production systems depending on the Product and demand
environment in which they operate. Main objectives, which need to be considered, are:
• Production must shift from a supply/ push method of operation to a demand / pull method
based on customer needs.
• Manufacturing process must flexibly respond to market changes with rapid changeover
possibilities for mass customizations.
• Minimum lot sizes are planned to move toward a make to order environment.
• Required delivery dates rather than EOQ drive production priorities.
• Specific supply strategies are developed for each customer segment.
• Customer needs dates and requirements drive the process.
• Manufacturing, distribution and transportation plans are integrated.

Organizations can employ following Production Typologies to accomplish the above objectives:

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Manufacturing process Choices:

Considering the demand for the items, range of products, product design, equipment, material
movement, etc., manufacturing process choices can be categorized as follows:
Lot/Batch/Intermittent
Flow Line / Repetitive / Continuous
Project
Lot/Batch/Intermittent : In the batch / intermittent process, goods are produced in batches / lots. Work
centres are generally organized into groups / departments having the similar equipment and skills. Ex.,
all milling machines in one group, all Lathe machines in one group etc.,
These work centers can perform a variety of operations due to the different machine’s and skills present
and hence are capable of producing different products.
The products move along the various machines in the work centers based on the required operations to
be performed on them. These work centers hence comprise of general purpose machinery with the
flexibility of making a variety of products.
Control of work is managed through the individual work centers for each lot.

Flow Line / Repetitive / Continuous : In a flow line / repetitive / continuous manufacturing process,
workstations are organized in the sequence needed to make the product. The product moves from one
work station to the next along the defined sequence at an almost constant rate.

If the products are discrete ex., automobiles, Refrigerators etc., the process is called repetitive
manufacturing process. If the products are not discrete ex., gasoline, oils etc., the process is called
continuous manufacturing process.
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The repetitive / continuous manufacturing process has the following characteristics:
• Setting up of a flow line is justified only if the demand of the product is large enough.
• Only a limited range of products can be produced in each flow line
• The work stations comprise of specialized machinery and tooling required for the product
• Since the flow of products between the work stations is balanced and is nearly constant, there
is a minimal build up of work in process inventory.
Project: The Project manufacturing process choice is applicable to huge complex projects. In most
cases, the product is developed at a particular location with all the necessary resources and equipment
moving to the product development location.
Large aircrafts, ship building and construction are examples.

Production Environments:
On-Time Delivery is one of the key attributes in meeting customer expectations. To cater to the varying
needs of different customers, operations must device the required production environment / strategy
which will help in minimizing the lead times.
Production environment can be classified into
• Design / Engineer to Order
• Make to Order
• Assemble / Package to Order
• Make to Stock
Design / Engineer - to - Order: ETO environment caters to specific customers’ requirements. The
process starts with the preparation of unique / highly customized engineering designs of the product,
with the close involvement of the customer.
After the designs are finalized, required material is purchased and the components and subassemblies
are manufactured. Its during this process that inventories, mostly work in process are maintained. The
goods are then assembled and shipped to the customer. Hence the total delivery lead time that has to be
optimized in this environment to provide a faster customer service include

Make - To - Order : In this environment, the final product is made after the receipt of the customer
order. Standard components are purchased / manufactured and are usually stocked as raw material
inventory.
On receipt of customer orders, the product is made from these standard components and the process
may include minor customizations of the design.
The main activities contributing to the delivery lead time in this environment include the manufacturing
time, assembling time and shipping.

Assemble / Package - To - Order : In this environment, the standard components and sub-assemblies
are manufactured and stocked in the form of component / sub-assembly inventories.
On the receipt of the customer orders, these standard components / sub-assemblies are assembled
according to the configurable options specified by the customer. There is no design and product
manufacturing activity involved and hence the delivery lead time includes the time to assemble and
ship.

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Make - To - Stock : In this environment, the products are completely manufactured and the finished
goods are stocked as end item / finished goods inventory. On the receipt of customer orders, the goods
are packed and shipped to the customers and hence the delivery lead time in this environment comprises
of only the shipping time.

2. Demand Management Process:

Organizations have to forecast demand accurately. This will result in
• Synchronized flow of products and materials to customer demand
• Reduction of variability
Organizations should combine accurate demand forecasting with marketing plans, inventory
management and sales projections to gain an advantage over the competitors. Better demand
management process utilizes information resources to reduce costs, improve customer service and tap
into hidden value throughout the supply chain. In this process customer demand is continuously
gathered, complied and renewed in order to match the organization’s supply capability with the
requirements of the market.
The process has the following main objectives:
• Demand requirements and Supply capabilities are continuously modeled using point of sale
and “key” customer demand data.
• Market requirements and production plans are coordinated on an enterprise-wide basis.
• Multiple sourcing and routing options are considered at the time of receipt of the order.
• Demand and production rates are synchronized and inventories need to be managed.

3. Customer Relationship Management Process:

Organizations should maximize customer service as a means of providing focused point of contact for
all customer enquiries in order to insulate them from the complexity of a large, multi-divisional
corporation. Main objectives of a Customer Relationship
Management processes are:
• Customer service provides a single source of customer information, a point of contact for
administration of the product / service agreement.
• Instant promising / availability information is available for the customer
• On-line/real-time access to product and pricing information assists customers with quick order
placement.

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 • On-line/real-time access to order status information is available to support customer order
enquiries.

Procurement Process:
Organizations maintain relationships with major suppliers, which are corporately managed; in strategic
alliances while purchase order transactions become simplified and integrated with supply process.

Main objectives of an efficient Purchase Process are:

• Strategic plans of suppliers and organization are aligned to focus on resources on holding
down costs and developing new products.
• Supplier categorization and management is implemented on a corporate global basis, with
purchasing in a strategic contracting role.
• Purchase Order transactions are integrated with supply process to improve productivity and
all areas of supplier performance.