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Unit 3 Supply Chain Management

In the context of SCM, we will view all these activities as a

sequence of processes within and between different supply chain
stages, which combine to fill a customer need for a product.
There are two different ways to view the processes performed in a
supply chain:
1. The cycle view -- this view focuses on the process cycles
of the products (or services) to be delivered to customers
starting from the raw material stage and ending with end
products. The cycle view divides the whole supply chain into
four process cycles, namely:

procurement cycle;

manufacturing cycle;

replenishment cycle; and

customer order cycle.

2. The push/pull view -- this view focuses on the division of

the supply chain processes according to customer demand.
The push processes are initiated according to demand
speculation and the pull processes are initiated according to
real customer demand. The push/pull view allows supply
chain managers to analyse supply chain activities from a
global view, which leads to higher-level strategic decisions.
Evolution of supply chain management
Even though SCM is not just logistic planning and inventory control,
the development of modern SCM was triggered by needs in logistic
planning and inventory control.
The early development of SCM can probably be traced back to the
quick response program in the textile industry and efficient
consumer response (ECR) in the grocery industry in the US

The need for supply chain management

The need for supply chain management is basically driven by
changes in the business and industrial environment. During the
past few decades, there has been an evolution in competitiveness
for many industries and businesses. The competition turned to
manufacturing and business process efficiency. The success of
companies relied on techniques and practices such as lean
manufacturing, just-in-time production, and stockless production.
Companies had to seek other opportunities outside in order to
compete. Issues such as the following needed to be addressed:

Where should we source materials?

Where should we manufacture?

What distribution channels should we use?

How can we build a good relationship with business partners

and customers?

How can we obtain effective market information?

What is the most efficient logistics structure?

How can we coordinate information flows globally?

Supply chain strategy

It is clear from the last section that SCM is vital to a company's
success in today's competitive and globalized business
environment. To embark on SCM and to increase the chance of
success, a company must align its supply chain objectives with its
overall business strategy.
Managing the supply chain means managing across functional areas
in the company as well as managing interactions external to the
company with business partners. This cross-boundary nature of
SCM requires top-down support from the senior management of the
company to incorporate supply chain goals and capabilities in the
strategic plan of the company. This focus on integration can lead to
using the supply chain to obtain a sustainable competitive
advantage over the competitors

Supply chain performance measures

Over the last decade companies have put significant investment
into the reengineering of their supply chain in order to compete.
They have sought to implement integrated supply chain
management through changes in business processes and
technology, which involve substantial financial and human
resources. Given this investment, senior management has to think
about how to develop an appropriate system of measurement to
track the benefits resulting from SCM implementation and to
provide guidance to the company for continuous improvement in
order to respond to the rapid changes in the business environment.
One common practice for measuring the performance of any
business process is to base it on financial return. However, it is
problematic to totally rely on financial return as the measure of
performance for complicated business processes such as an
integrated SCM for the following reasons:

Measurement based on financial return tends to be

historically oriented and lack a forward-looking perspective,
and hence fails to provide guidance for future improvement.

Such measurement does not relate directly to strategic

performance. For example, a start-up company may set
market share as its strategic SCM objective, but financial
return may not accurately reflect performance in this

This kind of measurement may not directly tie to operational

effectiveness and efficiency given such a complicated
system involving cross-functional processes internally and
business partners externally. For example, financial return
may be good in a favourable economic atmosphere despite
an inefficient and non-effective supply chain.

In recent years, a new approach to performance measurement,

called the 'balanced scorecard' approach, has been adopted to
assess corporate performance.

Inventory management
Managing economies of scale in a supply chain
To control the inventory of a product, we have to decide how much
of the product to order and how frequently. Traditionally, this
problem has been formulated as a decision problem. Mathematical
models have been developed to help determine the optimal order
quantity based on some simplified assumptions. These have been
further developed and extended into many complex and
sophisticated models. Using these models generally requires the
following information:

the inventory on hand and on order;

forecast of demand;

lead times of order delivery; and

estimates of inventory costs.

The inventory costs can be divided into the following components:

holding or carrying costs -- cost of storage, capital and


setup or order costs -- costs associated with the production

of a lot internally or the placing of an order externally with a

shortage or out-of-stock costs -- loss of profit and any 'illwill' generated; and

purchased material costs.

You can realize why inventory management is so important,

because inefficiency in any area breaks the supply chain and results

in a degradation of performance. For a complex supply chain, the

management of inventory will be much more difficult. Since
demand is uncertain in most situations, it is very difficult to
determine how much to order so that customer needs can be
fulfilled at minimal cost.
There are different approaches to manage each type of inventory. A
major distinction in the way different kinds of inventory are
managed results from the nature of demand.
Basically, demand can be divided into two categories: dependent
and independent demand.
Dependent demand derives from plans to make certain products,
e.g., raw materials, parts and assemblies.
Independent demand is normally for finished goods, and the
demand is mainly determined by some entity outside the producing
organization, e.g., customers. Referring to Figure 3.1, the raw
material and WIP inventories are subject to dependent demand and
the finished goods are subject to independent demand.
Dependent demand tends to be sporadic or 'lumpy' (i.e., large
quantities will be needed of a specific item, with little or no use of
that item at other times) because it is generated from the need for
some other items.
Independent demand is continuous although it may vary from
time to time. For this reason, we can actually predict the need for
dependent-demand items but not independent-demand items.
Dependent-demand items need only be stocked just prior to the
time they will be needed in the production process but
independent-demand items must be carried on a continued basis.

Managing uncertainty in a supply chain

In the inventory model, the re-order level is set such that a
replenishment order will arrive when the inventory level drops to
zero. This is an ideal situation because it assumes the product has
a constant demand.
In reality, the demand will vary and if the demand exceeds the
expectation during the lead time, an out-of-stock situation will
occur and seriously affect customer service as well as profit.
To avoid being out-of-stock, a certain amount of safety inventory
will be kept in the system to satisfy an unexpectedly high demand
during the lead time. The safety inventory will act as a buffer for
serving customers.
The appropriate level of safety inventory is determined by two
factors: the uncertainty of demand and the desired level of product
availability (or service level). The safety inventory level can be
derived from these two factors statistically. Now, read the textbook
to study how the safety inventory can be derived for the case with
or without fixed ordering costs.
Practical issues
To be effective, the inventory management system must include:

a system to keep track of the inventory on hand and on


a reliable forecast of demand that includes an indication of

possible forecast error;

knowledge of lead time and its variability; and

reasonable estimates of inventory costs

Logistics network configuration and distribution

Transportation in a supply chain
Transportation deals with moving a product in a supply chain.
Transportation decisions can involve mode selection, shipment size,
routing and scheduling.
These decisions are influenced by many factors such as the
proximity of warehouses to customers or plants, the required level
of customer service, the size of the storage facility, etc.
Transportation also affects decisions in inventory management and
facility location in a supply chain. Therefore, it has a direct impact
on the responsiveness and efficiency of the supply chain. The
success of any supply chain, particularly a global one, is closely
linked to the appropriate use of transportation.
Distribution strategies
The design of a transportation network directly affects the
performance of a supply chain. Chopra and Meindl (2001)
suggested the following five alternative design options for
transportation networks to take advantage of three outbound
distribution strategies.

Direct shipment network (Figure 3.2) -- all shipments come

directly from suppliers to the retail store.

Direct shipment with milk runs (Figure 3.3) -- a supplier

delivers directly to multiple retail stores on a truck by a milk

All shipments via a central distribution center (Figure 3.4) -all shipments are delivered to a central distribution center
(DC) to breakbulk, crossduck (or mix), or consolidate into
many smaller shipments for delivery to retail stores.

Shipping via a distribution center using milk runs (Figure

3.5) -- this is similar to the previous method, except milk
runs are used for delivery from the DC to retail stores to
reduce outbound traffic.

Tailored network -- a network specifically designed to meet

the transportation requirements of an organization using a
combination of crossducking, milk runs, etc

Network design in a supply chain

Network design is a complex decision problem. To find solutions,
you normally have to go through the following steps:
1. define the problem
2. collect the data
3. formulate the model and validate the data
4. solve the problem.
Logistics problems usually deal with a decision that balances the
cost of allocation of resources (e.g., a warehouse) against the level
of customer service. The following reading from the textbook
describes a typical scenario of how to define the network design
Network design is a complex decision problem. To find
solutions, you normally have to go through the following steps:
1. define the problem
2. collect the data
3. formulate the model and validate the data

4. solve the problem.

Logistics problems usually deal with a decision that balances the
cost of allocation of resources (e.g., a warehouse) against the level
of customer service. The following reading from the textbook
describes a typical scenario of how to define the network design