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Unit Five

5.1 Definition of Supply Chain Management.

Supply chain encompasses all activities associated with:-

the flow and transformation of goods from the raw materials stage, through the end user,
The material and information flow both up and down the supply chain.

A supply chain is a network of facilities and distribution options that performs:

the functions of procurement of materials,

transformation of these materials into intermediate and finished products, and
the distribution of these finished products to customers

Upstream supplier network and its downstream distribution channel.

The supply chain includes:-

the management of information systems

sourcing and procurement
production scheduling
order processing
inventory management
warehousing
Customer service, and after market disposition of packaging and materials.

First, supply chains are essentially a series of linked suppliers and customers;

From the focal firms perspective, the supply chain includes

Internal functions,
Upstream suppliers, and
Downstream customers

The second major part of supply chain management involves the management of upstream
external supply chain members.

Purchasing managers are responsible for ensuring that

a) the right suppliers are selected,

b) meet performance expectations,
c) appropriate contractual mechanisms are employed, and a good relationship is maintained
with these suppliers
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Materials managers are responsible for:-

a. planning, forecasting, and

b. scheduling material flows between suppliers in the chain
c. work closely with production schedulers to ensure that suppliers are able to deliver the
materials on time to the required locations,
d. Plan ahead of actual production and delivery dates.

Finally, a firms external downstream supply chain encompasses all of the downstream
distribution channels, processes, and functions that the product passes through on its way to the
end customer.

Within the downstream portion of the supply chain, logistics managers are responsible for the
actual movement of materials between locations.

Distribution management involves the management of packaging, storing, and handling of

materials at receiving docks, warehouses, and retail outlets.

Supply chain management can be seen as

the process of strategically managing the procurement, movement and storage of

materials, parts and finished inventory 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.

5.2 Evolution of Supply Chain Management (SCM)

The concept of supply chain existed right from the evolution of trade.

First, there was a fragmented supply chain approach.

Every department was an isolated island and hostile (unfriendly) relationships were
observed with other trading organizations like suppliers, wholesalers, dealers, etc.
The scenario started changing by the advent(arrival) of the

Material Requirement Planning (MRP) systems,

Enterprise Resources Planning (ERP) systems.

The relationships between the trading organizations were improving which was referred to as
partnership.

This evolution ultimately resulted into supply chain management

SCM function is the outgrowth of the unified evolution of manufacturing management and
logistics management functions.
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Logistics management evolved from unified evolution of materials management and sales
and distribution.

5. 3 Elements of Supply Chain

In any given supply chain there is some combination of companies who perform different
functions.

1. Producers
2. Distributors
3. Retailers
4. Customers
5. Service providers

5.4 Process view of a supply chain

There are two different ways to view the processes performed in a supply chain

1. Cycle view: -

2. Push/pull view:

Pull processes are initiated by a customer order, and push processes are initiated and performed
in anticipation of customer orders.

1. Cycle view of supply chain processes

Supply chain processes can be broken down into the following four processes cycles.

a) Customer order cycle

b) Replenishment cycle
c) Manufacturing cycle
d) Procurement cycle

Customer order cycle:-Occurs at the customer/ retailer interface and includes all processes
directly involved in receiving and filling the customers order.

The processes involved in the customer order cycle are:

Customer arrival
Customer order entry
Customer order fulfillment
Customer receiving
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b. Replenishment cycle:-occurs at the retailer/distributor interface and includes all processes

involved in replenishing retailer inventory.

Initiated when a retailer places an order to replenish inventories to meet future

demand

Objective: - to replenish inventories at the retailer at minimum cost while providing the
necessary product availability to the customer

The processes include:

Retail order trigger

Retail order entry
Retail order fulfillment
Retail order receiving

c. Manufacturing cycle:-Occurs at the distributor/ manufacturer interface and includes all

processes involved in replenishing distributor inventory.

It presented by:-

customer orders,
replenishment orders from retailer or distributor, or
by the forecast of customer demand and current product availability in the manufacturers
finished product warehouse

The processes include:-

Order arrival from the distributor, retailer, or customer.

Production scheduling
Manufacturing and shipping
Receiving at the distributor, retailer, or customer.

d. Procurement cycle: - occurs at the manufacturer/ supplier interface and includes all processes
necessary to ensure that materials are available for manufacturing to occur according to schedule.

2. Push/ pull view of supply chain processes

All processes in a supply chain fall into one of two categories, depending on the timing of their
execution relative to customer demand

1. in pull processes, execution is initiated in response to a customer order

2. Push processes are those that are executed in anticipation of customer orders
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At the time of execution of a push processes, demand is not known and must be forecast

5.5 Decisions phases in a supply chain

These decisions fall into three categories/ phases depending on the frequency of each decision
and the time frame over which a decision phase has an impact.

1. Supply chain strategy or design

Decisions made during this phase are also referred to as strategic supply chain decisions.

Strategic decisions made:-

location and capacities of production and warehousing facilities,

products to be manufactured or stored at various locations,
modes of transportation to be made and
type of information system to be utilized

2. Supply chain planning: includes decisions regarding which markets will be supplied from
which locations

3. Supply chain operations

The time horizon here is weekly or daily, and during this phase companies make
decisions regarding individual customer orders
At the operational level, supply chain configuration is considered fixed and planning
policies already defined
The goal of supply chain operations is to implement the operating policies in the best
possible manner
Firms allocate individual orders to inventory or production, set a date that an order is to
be filled,

generate pick lists at a warehouse,

allocate an order to a particular shipping mode and shipment,
Set delivery schedules of trucks, and place replenishment orders.

5.6 Drivers of Supply Chain

The five drivers of supply chain performance:

a. inventory,
b. transportation,
c. facilities,
d. production and
e. information
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a. INVENTORY

Inventory is all raw materials, work in process, and finished goods within a supply chain

Role in the Supply Chain

Inventory exists in the supply chain because:-

mismatch between supply and demand

it is economical to manufacture in large lots that are then stored for future sales
increase the amount of demand that can be satisfied by having the product ready and
available when the customer wants it
to reduce cost by exploiting any economies of scale that may exist during both production
and distribution

Role in the competitive strategy

There are three basic decisions to make regarding the creation and holding of inventory:

1. Cycle inventory: - amount of inventory needed to satisfy demand for the product in the period
between purchases of the product.

2. Safety inventory: - inventory held just in case demand exceeds expectation;

It is held to counter uncertainty

Choosing safety inventory involves making

a tradeoff between the costs of having too much inventory and

The costs of losing sales due to not having enough inventories.

3. Seasonal inventory: - inventory that is built up in anticipation of predictable increases in

demand that occur at certain times of the year.

Inventory that is built up to counter predicable variability in demand

Inventory in periods of low demand and store it for periods of high demand

b. Transportation:-Movement of everything from raw material to finished goods between

different facilities in a supply chain.

Faster transportation, allows a supply chain to more responsive but reduces its efficiency

There are six basic modes of transport that a company can choose from:

1. Ship which is very cost efficient but also the slowest mode of transport
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2. Rail which is also very cost efficient but can be slow.

3. Pipelines can be very efficient but are restricted to commodities that are liquids or gases such
as water, oil, and natural gas

4. Trucks are a relatively quick and very flexible mode of transport. Trucks can go almost
anywhere.

5. Airplanes are a very fast mode of transport and are very responsive

6. Electronic transport is the fastest mode of transport and it is very flexible and cost efficient

C. facilities

Role in the supply chain

They are the locations to or from which the inventory is transported.

Within a facility, inventory is either transformed into another state or stored before being
shipped to the next stage.

Role in the competitive strategy

When inventory perform their functions are key driver of supply chain performance in terms of
responsiveness and efficiency.

d. Location

Location refers to the geographical sitting of supply chain facilities

In Making Decision, Companies must consider issues related to local area include:-

macroeconomic factors,
quality of workers,
cost of workers,
cost of facility,
availability of infrastructure,
Proximity to customers and the rest of the network, and tax effects.

e. Capacity: flexibility versus efficiency

Companies:-decide what a facilitys capacity to perform its intended function/functions will be

Excess capacity, however, costs money and therefore can decrease efficiency

f. Production
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Production refers to the capacity of a supply chain to make and store products

The facilities of production are factories and warehouses.

g. Warehousing methodology

1. Stock-keeping unit (SKU) storage- in this traditional approach, all of a given type of product
is stored together efficient and easy to understand way to store products

2. Job lot storage- in this approach, all the different products related to the needs of a certain
type of customer/needs of a particular job are stored together.

3. Cross docking- in this approach, product is not actually warehoused in the facility. Large lots
are then broken down into smaller lots.

h. Information

Information is used for two purposes in any supply chain:

1. Coordinating Daily Activities related to Production; inventory; location; and transportation.

2. Forecasting and planning to anticipate and meet future demands.

Components of information decisions

a. Push versus pull

Push systems: - require information in the form of elaborate material requirements planning
systems to take the master production schedule and roll it back, creating schedule for suppliers
with part types, quantities, and delivery dates.

Pull systems: - require information on actual demand to be transmitted extremely quickly

throughout the entire chain so that production and distribution of parts and products can
accurately reflect the real demand

b. Coordination and information sharing

Supply chain coordination occurs when all the different stages of a supply chain work toward the
objective of maximizing total supply chain profitability rather than each stage devoting itself to
its own profitability

c. Forecasting and aggregate planning

Forecasting is the art and science for making projections about what future needs and conditions
will be.
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Obtaining forecasting information frequently means using sophisticated techniques to estimate

future demand or market conditions.

Aggregate planning transforms forecasts into plans of activity to satisfy the projected demand.

Enabling technologies

Many technologies exist that share and analyze information in the supply chain

Some of these technologies include:

1. Electronic data interchange (EDI) allows companies to place instantaneous, paperless

purchase orders with suppliers.

2. The internet has critical advantages over EDI with respect to information sharing.

3. Enterprise Resource Planning (ERP) systems provide the transactional tracking and global
visibility of information from any part of a company and its supply chain that allows intelligent
decisions to be made.

4. Supply chain management (SCM) software adds a higher layer to ERP systems

Unit Six

Buyer-supplier Relationships

6.1 What is buyer- supplier relationship?

A buyer may prefer to have a reactive kind of relationship; that is, the relationship is one time,
focused on price, choosing to maximize his gains at the expense of his counterpart.

Or a buyer may want to establish a win-win and long-term relationship with a supplier.

Definition of commercial

1. .Profitable; having profit as the main goal

Definition of relationship

1. The state of being related....

2. The friendship, contact, communications etc which exist between people

Concerned with people, contact and communication

Purchasing and supply relationships involve a degree of closeness
Entered into for the purpose of mutual benefit
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Important to establish effective relationships with suppliers.

6.2 Types of buyer-supplier relationship

There are three types of Buyer- Supplier relationships:

1) 1.Transactional,
2) 2.Collaborative, and
3) 3.Alliance

6.2.1 Transactional Relationships

Transactional simply describes an arms-length relationship where in neither party is

especially concerned with the well-being of the other
Virtually all buying firms will have transactional relationships

Characteristics of transactional relationships

An absence of concern by both parties about the other partys well-being

One of a series of independent deals
Each transaction is entered into on its own merits
Little or no basis exists for collaboration and learning
Costs, data and forecasts are not shared
Arms-length transactions, not openness, are characteristics of transactional
relationships
Price is the focus of the relationship
Getting the best price is the focus of the transaction
Ideally, total cost analysis precedes any procurement transaction
A minimum of purchasing time and energy is required to establish prices
Market focuses normally establish prices in transactional relationships
Transactional purchases lend themselves to e-procurement and, in some cases, reverse
auctions

Advantages

Relatively less purchasing time and effort are required to establish price
Lower skill levels of procurement personnel are required
Much less judgment and managerial expertise are required with the vast majority of
transactional procurements

Disadvantages

The potential for communication difficulties is much greater with transactional

relationships than with collaborative or alliance ones
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Considerable investment in expediting and the monitoring of incoming quality is required

to ensure timely delivery of the right quality
Transactional relationships are inflexible when flexibility may be required
Transactional procurements tend to result in more delivery problems than do
collaborative and strategic alliance ones
Friends look out for friends, not opportunistic buyers or suppliers
Quality with transactional relations will be only as good as required
Transactional suppliers tend to provide the minimum service required
Transactional suppliers have much less to lose from a dissatisfied customer than do
collaborative strategic relationship suppliers

6.2.2 Collaborative Relationships

Collaborative and alliance relationships tend to result in lower total costs than do transactional
relationships for several reasons

Cost reductions resulting from value engineering and value analysis (VE/AA) are much more
likely with collaborative and alliance relationships

Suppliers are more likely to take the initiative to reduce costs through VE/VA when they are
involved in long-term relations than with short-term transactional ones

Researchers Stanley and Pearson found that the three most important factors in a successful
buyer-supplier relationship are:

1. two-way communication;
2. the suppliers responsiveness to supply managements needs, and
3. clear product specifications

End objective: - reduction in total costs, improved quality timeliness also result

Collaborative suppliers look out for their friends, not their opportunistic customers

The major disadvantage of collaborative and alliance relationships are:-

the amount of human resources,

time, and
energy required to develop and manage the relationship

6.3 Supply Alliances

D/ce b/n collaborative relationships and supply alliance- presence of institutional trust in
alliances

Supply alliances reap incredible benefits as a result of:-

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physical asset specialization and

human specialization

Dyer defines physical asset specialization as:-

Specific capital investments (e.g., in customized machinery, tools, information systems,

delivery processes and so forth) that allow for faster throughput and greater product
customization.

Physical asset specialization allows,

for product differentiation and

may improve quality by increasing product integrity

Human specialization refers to relationship specific know-how accumulated by individuals

through long-standing relationships

The Primary Benefits to Supply Alliances Include:

Lower total costs

Synergies
Reduced time to market
Improved quality:- design of experiments and supplier certification
Improved technology flow from suppliers
Improved continuity of supply Alliance

Alliance Share Several Attributes:

Focus of most supplier alliances:-

A high level of interdependence and commitment is present
An atmosphere of cooperation exists
Potential conflicts are addressed and resolved openly.
When problems occur, the focus is a search for the root cause, not the assignment of
blame

The alliance is controlled:-

formal and informal interpersonal connections,

information systems, and
internal infrastructures that enhance learning

Openness exists in all areas of the relationship including:-cost, long-term objectives, technology,
and the supply chain itself

The alliance is a system evolves with the objective of creating new benefits for both parties
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The alliance partners share a vision of the future is the area of the interface.

Ethics take precedence over expediency

The relationship is adaptable in the face of:- changing economics, completion, technology, and
environmental issues

6.4 Situations where in Alliances May Not Be Appropriate

Quite obviously, alliances are not always appropriate Professor Ralph Kauffman has
identified 14 such situations and has developed them into 5 major categories:

1. Stability of the prices, market, and buyers demand

a. Price volatility: commodities traded on open markets that have significant price volatility

b. Demand Volatility: Materials or services that have significant volatility in individual buyer
demand

c. High Switching Likelihood with High Switching Costs:

2. Capability of potential suppliers

a. No Partnership/Alliance-Capable Suppler for the Item:

b. No Partnership/Alliance-Capable Supplier in the Geographic Area:

c. Rapid Technological Change:

d. Mismatch of Clock Speed:

3. Competition in the supply market

a. Non competitive Market:

b. Supplier Dependency Creation:

c. Neglected Areas:

d. Suppliers Seeding to Reduce competition:

4. Benefits to the buying firm form the relationship

a. No Leverage from Partnership:

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b. No Hard Savings from Partnership:

5. Internal Buy-In to partnership

No Internal Customer Buy-In:

Unit Seven

7. Specification and Standardization

7.1 Specification

Specifications are the most detailed method of describing requirements

Design specifications are the detailed descriptions of: - the materials, parts, and components to
be used in making a product

They are the descriptions that tell the seller exactly what the buyer wants to purchase

Purpose of specification

What is the importance of specification?

Purchase specifications serve a number of purposes, among them to:

Communicate what to buy

Communicate suppliers what is required
Establish the tangible goods to be provided
Establish the intangible services to be provided, such as :-warranty, maintenance, and
support
Establish the standards against which :-inspections, tests, and quality checks are made
Balance the specification goals of:-individual departments, relevant suppliers, desired
product or service performance and cost

7.1.2 Categories of specification

Purchase speciation can be classified into two brad categories:-

Simple (low detail) and

Complex (high detail)

Simple specifications:-Require less resources and time to develop than complex specifications

Completed with one sentence and have little need for collaboration between functional areas or
supply chain members
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There are five categories of simple specifications:-

1. desired performance,
2. Function and fit,
3. Brand or trade names,
4. samples market grades, and
5. Qualified products

Complex specification

A complex specification often goes beyond the design of a product, to include specifications
regarding:- methodology, packaging, transport, delivery schedule, warranty, and service

There are four principle types of complex specifications: -

1. commercial standards,
2. design specifications,
3. engineering drawings, and
4. material and method-of- manufacture specifications

7.1.3 Development of specifications

Informal approach
Supply Management Coordinator Approach
Early Supply Management Involvement
Early Supplier involvement
Consensus Development Approach
Cross-Functional Team Approach

7.2. Standardization

A uniform identification that is agreed on is called a standard

Industrial standardization can be defined as the process of establishing agreement on uniform

identifications for definite characteristics of :-quality, design, performance, quantity, service, and
so on

7.2.1 Source and types of standardization

In industry, there are three basic types of materials standards:

international standards,
national standards, and
company standards
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7.2.2 Benefits of Standardization

Standardization benefits an organization in a variety of ways:

1. 1.Enables mass production

2. Enables customization
3. Improves supplier coordination
4. Enables delayed differentiation
5. Lowers inventories