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Basic Concept of Supply chain & Philosophy of Supply chain

A supply chain includes all the processes that add customer desired value to material and bring it
to the customer. This value gets added at various stages of the journey that materials take till it
reaches the customer.
Supply chain management is an integrated process that integrates management and information
technology so that a flawless result is produced. SCM provides flawless delivery of information
and services. In an organization SCM deals with:
Purchase of Raw material
Receipts of order
Purchase and delivery of finished products
Maintain all the process in the organization
It is an extended process which integrates internal and external partners on the basis of supply of
process and then forwards that process to get information about raw materials and finished
goods. SCM cut the costs and boost up the engineering, logistics etc. SCM also help in
wholesaling and retailing to reengineering, marketing and logistics.
Definition of SCM
The definition of SCM encompasses the planning and management of all the activities involved
in sourcing and procurement, conversion and all the logistics management activities.
It also includes coordination and collaboration with channel partners, which can be suppliers,
intermediaries, third party service providers and customers.
So, it can be stated that supply chain management integrates supply and demand management
within and across companies.
According to Council of Logistics Management:
SCM is an integrated function with primary responsibility for linking major business functions
and business processes within and across companies into a cohesive and high performing
business model. It includes all the logistics management activities as well as manufacturing
operations and it derives coordination of processes and activities with and across marketing,
sales, product design, and finance and information technology.
The integration of business processes from end user through original suppliers that provide
products, services and information that adds value for customers.
A supply chain is a network of facilities and distribution options that performs the functions of
procurement of materials, transformations of these materials into intermediate and finished
products and the distribution of these finished products to customers.
Characteristics of Supply Chain Management:
Since a SCM work in cross-functional boundaries so it is a source of raw materials and
finished goods from anywhere in the world.
It provides flawless basic and customized services.
SCM provides a global business strategy so that every local and global organization
executes its services.

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Information can flow via networking based technologies and it can be distributed among
various users at a time.
SCM includes various standards that supports it in seamless transactions. It includes
standards like cost accounting standards, third party verification standards, information
and measurement system etc.
SCM helps in development and implementation of various accounting models i.e.
Activity Based Costing

Supply Chain Types:

1. Raw Supply chains are the basic type that were loosely organized and mostly conformed
to the legacy style. These so-called supply chain are found in ancillary unit and small
scale industries.
2. Ripe supply chains are the one where companies thought this was it and they have
achieved all that there is to achieve. All the activities are done in an organized manner.
These chains exist in the food sector.
3. Internal supply chains are the most commonly found where the companies have
implemented sophisticated enterprise resource planning packages.
4. Extended supply chains are the internally optimized chains that extend well beyond the
companys boundaries to include the suppliers and distributors into their fold.
Automotive sector mostly use such chains.
5. Self monitored supply chains are the ones where the manufacturing company takes the
lead in bringing all partners in its fold and hence these supply chains are company centric
and not customer centric.
6. Outsourced supply chains are where the logistics partner usually takes of everything.
7. Production oriented supply chains have a one point agenda: produce to operating
capacity and labour. Marketing and distribution are relatively the non issues.
8. Financial oriented supply chains or more fondly known as cash to cash cycle chain
provides a company with negative working capital. These leave a company with high
cash holding for use elsewhere.
9. Market oriented supply chains or customer supply chains are the typical built-to-order
type of chains that get triggered when the customer places an order.
10. Value chains are the ultimate integration that is aimed at total optimization and not
optimization in parts.
Objectives of Supply Chain Management:
To reduce the physical supply chain links
To define supply chain responsibilities to a specific core service competency
To decrease the time and cost of getting end user customer products in volume to markets
worldwide
Supply Chain constituents or Functions of SCM:
Information (flow)
Supply (Suppliers Management)
Production
Distribution (Management)
Channel (Management)
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SCM Activities:
SCM is the combination of art and science that goes into improving the ways a company finds
the raw material and components it needs to make a product or service, manufacture that product
or service and delivers it to the customers. Following are the activities involved in supply chain:
Plan- Planning a strategy for managing all the resources that goes towards meeting
customer demand for products or service.
Source- Choosing suppliers who will deliver goods and services as per specification.
Make- This activity involves manufacturing and converting the raw material into the
finished product.
Deliver- this involves logistics or distribution. It consists of all the steps necessary in
reaching the product to the customer.
Return- Handling exceptions and errors wherein the customer wants to return some or all
of the products.
Various flows (cash or money, value or material, information) in supply chain:
Information Flow: The request for quotation, purchase order, monthly schedules, engineering
change requests, quality complaints, reports on supplier performance flows from Customer side
to supplier side. From supplier side to customer, it would be presentation of company, offer,
confirmation of purchase order, reports on action taken on deviation, dispatch details, report on
inventory, invoices etc. If supply chain has to be successful, constant interaction has to happen
between supplier and customer.
Material or value flow: It moves typically from Supplier to Customer. It could be through
various warehouses among distributors, dealers and retailers. Challenge here is to ensure that
material flows quickly without halting as inventory in various points in the chain. Faster it
moves, better it is for the company as it reduces cash cycle. For repairs, exchange, at the end of
life material can also flow from Customer to Supplier.
Money or Cash flow: Based on invoice raised by supplier, Customer does verification for
correctness. If that is correct, money will flow from Customer to Supplier. There could also be
flow of money from Supplier to Customer as debit notes.

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Role of Information Technology in SCM

Without information, a manger cannot make sound decisions. The information technology helps
to ascertain demand potential, inventory in stock, right time for production and shipping.
Information makes supply chain visible to a manager. A manager can make decisions to improve
the supply chains performance by integrating and coordinating the supply chain and executing
transactions efficiently with the help of information technology. The information technology has
a very important role for a supply chain manager to improve the performance of supply chain
through securing and analyzing information with the help of IT to take sound decision and to
execute it.
The role of IT in supply chain management is as under:
i. IT consists of hardware, software and people that gather, analyze data to ascertain
information to facilitate sound decision making.
ii. IT system helps to improve supply chain performance through capturing and analyzing
information.
iii. It enables management to take decisions over broader scopes that take into account all the
factors that affect the supply chain.
iv. A global scope of supply chain requires accurate and timely information about all
company functions and organizations in supply chain which is facilitated by IT.
Following characteristics in information is required to take useful supply chain decisions:
Information must be accurate
Timely information
Information should be relevant
Information is used to take a wide variety of decisions about following supply chain drivers:
i. Facility- Determining the location, capacity, and schedules of the facility requires
information on the trade-off among efficiency and flexibility, exchange rates, taxes, and
so on.
ii. Inventory- Determination of optimum inventory level requires information about
demand pattern, carrying cost, stocking out cost, ordering cost.
iii. Transportation- To take decisions on transportation networking, routing, modes,
shipment and vendors; the information about costs, customer locations, shipment size are
required.
iv. Sourcing- in vendor selection information about margin, prices, quality, deliver y lead
time is required.
v. Pricing and Revenue Management: to set pricing policy, one requires information
about demand and segment wise willingness to pay.

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How IT solve the supply chain problems (Role of IT)

Problems or lack in supply chain IT tools used for smoothening supply chain
1 Linear sequence of processing is to slow Parallel processing using workflow softwares
Waiting time between chain segments are Identify reason (using DSS) and expedite
2
excessive communication and collaboration(intranet etc.)
3 Existence of non-value-added activities Value analysis and simulation software
Electronic documents & Communication
4 Slow delivery of paper documents
System
Repeat process activities due to wrong Electronic verification automation, electronic
5
shipments, poor quality etc. control system, eliminating human errors
Batching, accumulate work orders between
SCM software analysis, digitizer documents
6 supply chain processes to get economies of
for online delivery
scale
Learn about delays after they occur, or learn Tracking systems, anticipating delays, early
7
too late detection (Intelligence system)
Excessive administration control such as
Parallel approvals (workflow) electronic
8 approvals (signature), approvers are in
approval system, analysis of need.
different location
Internet/Intranet, software agents for
Lack of information or too slow flow of
9 monitoring and atleast, barcodes, direct flow
information
from POS terminals
Lack of synchronization of moving workflow and tracking system,
10
materials synchronization by software agents
Poor coordination, cooperation &
11 Collaboration tools, intranets, extranets
communication
use robots in warehouse, use warehouse
12 Delays in shipments from warehouse
management software
Redundancies in the SCM. Too many
Information sharing via web, ECS, reducing
13 purchasing orders, too many handling &
inventory level
packaging
Supply Chain IT Framework:
It is important to develop a supply chain IT framework that helps a manager understand how
these information are utilized by the various segment of IT within the supply chain. Three of the
main drivers of the software evolution are three major groups of supply chain processes, which
we call supply chain macro processes. The successful categories of software are those that focus
on the macro processes.
The Supply Chain Macro Processes

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From an enterprises perspective, all processes within its supply chain can be categorized into
three main areas: processes focused downstream, processes focused internally and processes
focused upstream. The three macro supply chain processes are as follows:
1. Customer relationship management (CRM): Processes that focus on downstream
interactions between the enterprise and its customers.
2. Internal Supply Chain management (ISCM): Processes that focus on internal operations
within the enterprise.
3. Supplier Relationship Management (SRM): Processes that focus on upstream
interactions between the enterprise and its suppliers.
There is a fourth important building block that provides the foundation on which the macro
processes rest. That is- transaction management foundation (TMF). It includes basic Enterprise
Resource Planning (ERP) systems (and its components, such as financials and human resources),
infrastructure software, and integration software. TMF software is necessary for the three macro
processes to function and to communicate with each other.

Supplier Relationship Internal Supply Chain Customer Relationship

Management Management Management
(SRM) (ISCM) (CRM)

Transaction Management Foundation (TMF)

Customer Relationship Management:

CRM macro process that takes place downstream in the supply chain generates customer demand
and facilitates transmission and tracking of orders. The key processes in under CRM are as
follows:
1. Marketing- The software available in marketing area for CRM provides analysis that
improves the marketing decisions on pricing, product profitability and customer
profitability. Marketing processes involve decisions regarding selection of target market,
what product to offer the target market, what price should be charged and how to develop
and maintain customer relationship.
2. Selling- The sell focuses on an actual sale to a customer. Marketing process is mostly
concerned with planning for whom to sell and what to sell. The sell process includes
providing the sales force the information they need to make the sale and then executing
the actual sale. Executing the sale requires the sales person or the customer to build and
configure orders by choosing among a variety of options and features. Sales process
should also include quoting of due dates and information access. The software available
to improve sales process, require targeted sales force automation, configuration and
personalization.
3. Order Management- The process of managing customer orders helps the customer in
tracking his order and helps the enterprise to plan and execute order fulfillment. The
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order management facilitates placement of demand by the customer according to his
option and supply to the customers by the enterprise. Order management software has
traditionally been handled by legacy systems or been a part of an ERP system. Recently
the other feature that has been added to order management system is- order visibility to
across order management systems within the company.
4. Call/Service Centre- A call/service centre is often the primary point of contact between a
company and its customers. It helps customers place orders, suggests products, solves
problems and provides information on order status. The software provided have helped to
reduce work done by customer service representatives by facilitating customers to do the
work themselves.
CRM processes are important for the supply chain, as they cover a vast amount of interaction
between an enterprise and its customers. To optimize performance of supply chain CRM process
must be integrated with internal operations and CRM software.
CRM softwares are growing very fastly and now it is the largest category among all macro
processes.
Supplier Relationship Management
SRM includes all those processes relating to interaction between enterprise and supplier that are
upstream in the supply chain. The processes included in SRM are the design collaboration,
sourcing, negotiation, buy and supply collaboration processes. Significant improvement in
supply chain performance can be achieved if SRM processes are well integrated with appropriate
CRM and ISCM processes.

SRM ISCM CRM

Design
Strategic Planning Market
Collaboration
Source Demand Planning Sell

Negotiate Supply Planning Call Centre

Buy Fulfillment Order Management

Supply
Field Service Order Management
Collaboration

TMF
While designing a product, incorporating input from customers is a natural way to improve the
design. This requires inputs from processes within CRM. Sourcing, negotiating, buying and
collaborating are primarily tied into ISCM as the supplier inputs are needed to produce and
execute an optimal plan. The integration of all the three macro processes of SCM is necessary to
improve supply chain performance. SRM has attracted all the big players from ERP. The major
SRM processes are as follows:
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1. Design Collaboration- The goal of this process is to improve the design of products.
Design of the product depends on consumer need, want and expectation. CRM could help
in the process. Design can be improved by the joint selection with suppliers of
components which will facilitate ease of manufacturing. The good collaboration at this
stage could create high value because about 80 percent of product cost is determined at
the design stage. Successful software in this area facilitates such collaboration.
2. Source- Source process helps in supplier selection, contract management and supplier
evaluation. Suppliers are evaluated on the basis of several criteria including lead-time,
reliability, quality and price.
3. Negotiate- Negotiation with suppliers requires a request for quotation (RFQ) and the
designing and execution of actions. Successful software in this area automates the RFQ
process and the execution of auctions. The goal of negotiation is to facilitate effective
contract that specifies price, delivery time that best matches enterprise needs.
4. Buy- Buying process executes the procurement of materials from suppliers. This includes
the creation management and approval of purchase orders. Successful software in this
area automates the procurement process and helps to decrease processing cost and time.
5. Supply Collaboration- Supply chain performance is improved by collaborating on
forecast, production plan and inventory levels after establishing an agreement for supply.
The goal of supply collaboration is to fit the suppliers plan with the companys plan of
inventory control to maintain uninterrupted supply for production and operations. Good
software in this area should be able to facilitate collaborative forecasting and planning in
the supply chain.
Supply Chain IT in Practice
1. Select an IT system that addresses the companys key success factors: Two or three
elements that really determine whether or not a company is going to be successful should
be search out to select supply chain IT systems. It enables a company to take advantage
in the areas most important to the success of the business.
2. Take incremental steps and measure value: Implementation of IT systems in a wide
variety of processes at the same time results in failure of many projects. It brings the
productivity down. One way to ensure success of IT projects is to design them so that
they have incremental steps.
3. Align the level of sophistication with the need for sophistication: Keeping in view the
key success factors a complex or sophisticated IT system may be developed which will
be uneasy in handling. It is compulsion because less sophisticated system may leave the
firm with a competitive weakness. However, trying to be too sophisticated leads to failure
of the entire system. So it is important to consider just how much sophistication a
company needs to achieve its goals.
4. Use IT systems to support decision making, not to make decisions: Software available
today can make many supply chain decisions for management. But supply environment is
continuously influx of change as customer and competitive landscape is changing. So,
managerial effort in decision making should not be replaced by IT system. It should be
considered as a tool to support decision making.
5. Think about the future: If there are trends in companys industry that indicates about
significant characteristics that will become important in future, managers are required to
take in consideration that their IT choice takes these trends into account.

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Benchmarking

Benchmarking is the systematic study of the absolute best firms to take their best practices as the
standard of comparison with a purpose to achieve that standard or even surpass it.

Benchmarking is important because it emphasizes on constant search for better solutions. The
continuous search for best practices in the best firms, for using and improving further those
practices, a company could be converted into an exceptional company. Benchmarking could be
applied to the different functions of business. For example, production, marketing, purchasing,
information technology management, customer service etc.

Classification of Benchmarking:

On the basis of what is to be compared there are three types of benchmarking-

1. Performance Benchmarking: This is comparing the performance of a company with the

performance of the other company to determine how much the company is good in its
performance.
2. Process Benchmarking: It is concerned with comparing the methods and practices for
performing processes.
3. Strategic Benchmarking: It is to compare the long-term decisions and courses of actions
taken by other organizations to achieve their objectives.

On the basis of with whom to compare oneself the benchmarking could be classified in four
categories-

1. Internal Benchmarking: It is a comparison between units or department of t he same

organization.
2. Competitive Benchmarking: It is direct comparison of ones own performance against
the best competitors.
3. Functional Benchmarking: It is a comparison of processes of functions against non-
competitive organizations within the same sector or technological area.
4. Generic Benchmarking: It is a comparison of ones own processes against the best
practices anywhere in any type of organization.

Procedure or Steps involved in Benchmarking:

1. Identify the problem area

2. Identify organizations that are leaders in these areas
3. Study their best practices
4. Implement the best practices

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5. Repeat

Cost of Benchmarking:

Visit Cost- This includes hotel rooms, travel costs, meals, a token gift and labour time
costs.
Time Cost- When the members of the benchmarking team go for research, they do not
remain available for their regular tasks. The additional staff required in their absence, for
that also company has to bear cost.
Benchmarking Database Costs- When a company takes benchmarking as a regular
process, creation and maintenance of database of best practices and the best practices of
the companies associated with this practice also involves a cost.

Benefits from Benchmarking:

Incorporation of the best practices into the process of the benchmarked functions.
Stimulation and motivation of the professionals whose creativity is required to perform
and implement benchmark findings.
Break-down reluctance of operations to change.
Benchmarking sometimes becomes a source to identify and provide technological
breakthrough.

Benchmarking the Logistics Process:

The underlying philosophy of logistics process benchmarking is that the key to success in quality
improvement is not only to rely upon inspection of the output of the process, rather to improve
the process itself. The supply chain process is just like a pipeline that begins with suppliers, runs
through the business organization involving manufacturing or any form of value addition
activity, through intermediaries to customers. To ensure customer satisfaction everything that
happens in the pipeline should be monitored and controlled.

The first step in improving performance in the service pipeline is to understand the structure of
the process. The network of materials and information flows, activities and procedures that link
suppliers with end users is complex. To define the pipeline structure a flowchart of the steps
along the chains should be created, which begins with the customers order and ends with
delivery.

The next step is to identify critical points where something may go wrong. Disturbances on any
point may affect the whole process. For example, stock out in warehouse or failure to meet a
production plan may result in failure of the entire process to achieve its purpose.

Supplier and Distributor Benchmarking:

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Supply chain performance dependson the quality of relationships that extend upstream to
suppliers and downstream to distributors. So, it should be included in the benchmarking process.
The focus should be upon enhancing efficiency and effectiveness of supply chain relationship
with an aim to improve the performance of the supply chain as a whole. In reviewing supplier
and distributor performance, the aim should be assessing their contribution to reduce total
delivered cost and increasing end user customer service.

The issues that need to be addressed in supplier and distributor benchmarking are-

1. Willingness to work as a partner/co-partner

2. Commitment to continuous improvement
3. Acceptance of innovation and change
4. Focus on throughput time reduction
5. Utilization of quality management procedure
6. Use regular and formal benchmarking processes themselves
7. Flexibility is seen as the prime goal in logistics system design
8. Do their employees share common core values of customer concern?
9. Do they actively seek to improve communications?
10. Does their leadership emphasize the primacy of total quality management?

Benchmarking in Supply chain performance:

Supplier Interface Internal Interface Distributor

Online performance Communications Throughput time Communications Value added services

Stock availability Schedule integration On-time performance Requirements Planning Customer concern

Quality Co-markership Stock availability Partnership Delivery performance

Above figure illustrates key area for benchmarking in supply chain. It is important to note that it
is not just supplier and distributor performance that should be monitored and compared to best-
in-class companies but also how interfaces are managed.

Many companies are conducting formal appraisals of vendors performance. However, it is not
sufficient just to monitor distributors performance in absolute terms. It should also be monitored
comparatively against other distributors with a reputation for superior performance.

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