Enterprise Resource Planning

MODULE 11 : Supply Chain Management (SCM) systems

Topics

• Meaning of Supply chain

• Types of Supply chains
• Supply chain management (SCM)
• Differences between ERP and SCM
• Basic components of SCM
• SCM examples
• Benefits of BPM

Meaning of Supply chain

A supply chain is defined as a set of relationships among suppliers, manufacturers,
distributors, and retailers that facilitate the transformation of raw materials into final products.
The supply chain includes all of the interactions between suppliers, manufacturers, distributors,
warehouses, and customers. They involve the flow of materials, information, money, and
services from raw materials suppliers, through factories and warehouses, to the end consumers.

The term supply chain comes from a picture of how the partnering organizations in a specific
supply chain are linked together. A typical supply chain links a company with its suppliers, its
distributors, and its customers. Note that a supply chain frequently involves three segments:
upstream, where sourcing or procurement from external suppliers occurs; internal supply chain,
where transformation (production), assembly, and packaging take place; and downstream, where
distribution to customers takes place, frequently by external distributors, or a disposal takes
place.

A supply chain also involves a product life cycle approach that goes from “dirt to dust.”
However, a supply chain is more than just the movement of tangible inputs, because it also
includes the movement of information and money, and the procedures that support the movement
of a product or a service. Finally, the organizations and individuals involved are part of the
chain, as well.

The supply chain also includes the organization processes for developing and delivering
products, information, and services to end customers. For example, materials move from sub-
suppliers to suppliers until they reach the manufacturer. Materials are then processed into final
products which are then transported via distributors and other marketing channels to the end
customers. Market research data, scheduling information, design data, and order and cash flow
data move in the opposite direction from the customers to the suppliers.

The supply chain is made up of all the activities that are required to deliver products to the
customer - from designing product to receiving orders, procuring materials, marketing,
manufacturing, logistics, customer service, receiving payment and so on. Anyone, anything,

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anywhere that influences a product's time-to-market, price, quality, information exchange,

delivery, among other activities is part of the supply chain.

Supply chain consists of facilities, functions and activities for producing and delivering product
or service from supplier to customer. It involves planning, managing, acquiring, producing,
warehousing, distribution and delivery.

Types of Supply chains

Supply chains come in all shapes and sizes and can be fairly complex. As can be seen in
this exhibit, the supply chain for a car manufacturer includes hundreds of suppliers, dozens of
manufacturing plants (for parts) and assembly plants (for cars), dealers, direct business
customers (fleets), wholesalers (some of which are virtual), customers, and support functions
such as product engineering and purchasing. In addition, sometimes the flow of information and
even goods can be bidirectional. For example, not shown in this figure is the return of products
(known as reverse logistics, or returns). For the automaker, for example, that would be cars
returned to the dealers in the event of defects or recalls by the manufacturer.

In fact, several major types of supply chains can be classified into four major categories:
integrated make to stock, build to order, continuous replenishment, and channel assembly. If a
company uses a build-to-order business model, for example, it will not be necessary to store
finished products, but raw materials and components will need to be stored. Therefore, it is clear
that supply chains depend on the nature of the company and its business processes.

Integrated Make to Stock : The integrated make-to-stock supply chain model focuses on tracking
customer demand in real time, so that the production process can restock the finished-goods
inventory efficiently. This integration often is achieved through use of an information system
that is fully integrated. Through application of such a system, an organization can receive real-
time demand information that can be used to develop and modify production plans and
schedules. This information also is integrated further down the supply chain to the procurement
function, so that the modified production plans and schedules can be supported by input
materials. An example is Starbucks Coffee (starbucks.com), which uses several distribution
channels. Starbucks not only sells coffee drinks to consumers, it also sells beans and ground
coffee to businesses such as airlines, supermarkets, department stores, and ice-cream makers. In
addition, sales can be made through direct mail, including the Internet. The system handles
distribution planning, manufacturing scheduling, and inventory control. The coordination of
supply with multiple distribution channels requires timely and accurate information flow about
demand, inventories, storage capacity, transportation scheduling, and more. The information
systems are critical for doing all of these functions with maximum effectiveness and reasonable
cost. Finally, Starbucks must work closely with hundreds of business partners.

Build to Order : Dell Computer is best known for its application of the build-to-order model. In
this model, one begins the assembly of the customer’s order (from components) almost
immediately upon receipt of the order. This requires careful management of the component
inventories utilize many common components across several production lines and in several
locations. One of the primary benefits of this type of supply chain model is the perception that

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each customer is receiving a personalized product. In addition, the customer receives it rapidly.
This type of supply chain model supports the concept of mass customization.

Continuous Replenishment : The idea of the continuous-replenishment supply chain model is to

replenish the inventory constantly by working closely with suppliers and intermediaries.
However, if the replenishment process involves many shipments, the cost could be too high,
causing the supply chain to collapse. Therefore, tight integration is needed between the order-
fulfillment process and the production and acquisition processes. Real-time information about
demand changes is required in order for the production process to maintain the desired
replenishment schedules and levels. This model is most applicable to environments with stable
demand patterns, as is usually the case with distribution of prescription medicines. The model
requires intermediaries when large systems are involved.

Channel Assembly : A slight modification to the build-to-order model is the channel-assembly

supply chain model. In this model, the parts of the product are gathered and assembled as the
product moves through the distribution channel. This is accomplished through strategic alliances
with third-party logistics (3PL) firms. These services sometimes involve either the physical
assembly of components and making finished products at a 3PL facility, or the collection of
finished components for delivery to the customer. For example, a computer company could have
items such as the monitor and the CPU shipped directly from its vendors to a 3PL facility, such
as at Federal Express or UPS. Therefore, the customer’s computer order would not come
together until all items were placed on a vehicle for delivery by the 3PL. A channel assembly
might have low or zero inventories and can achieve a faster market response time; it is popular in
the computer technology industry. The flow of goods, services, information, and financial
resources usually is designed not only to transform raw items to finished products and services
effectively, but also to do so in an efficient manner. Several types of software are available to
achieve this goal.

Supply chain management

SCM is the efficient management of the supply chain end-to-end processes that start with the
design of the product or service and end when it sold, consumed, or used by the end consumer.
Some activities include inventory management, materials acquisition, and transformation of raw
materials into finished goods, shipping, and transportation. SCM involves vendors, financial
accounting transfers, warehousing and inventory levels, order fulfillment, distributors, and the
information needed to manage it.
The main goal of modern SCM is to reduce uncertainty, variability, and risks, and
increase control in the supply chain, thereby positively affecting inventory levels, cycle time,
business processes, and customer service. These benefits contribute to increased profitability
and competitiveness. The benefits of SCM have long been recognized in business and in the
military. In today’s competitive business environment, efficient, effective supply chains are
critical to the survival of most organizations, and they are greatly dependent upon the supporting
information systems. Different product types require different features of a supply chain, and
SCM should aim to ensure that the supply chain matches the requirements of an organization’s
products and services.

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Effective management of the supply chain provides a major opportunity for an

organization to reduce costs while increasing operating efficiencies. Thus, SCM may provide a
significant competitive advantage. Organizations need to know how much, and in what
sequence, they will be investing in various supply chain efforts to leverage the benefits of the
technology. SCM models need to focus on more than one variable. The optimal strategy will
look at multiple variables including inventory, forecasting, lead time, capacity, and price.

SCM deals with the complete cycle of materials flows. SCM plays key role in Product
customization, Quality control, Cost reductions, and Speed-to-market. Effective SCM is to
balance the production stream with uncertainty (customer, supplier, economics, etc.).

Differences between ERP and SCM

Point of comparison ERP SCM

Comprehensive Yes, covers many more Relatively less
areas than SCM
Complexity Highly complex Relatively less complex
Sourcing tables Relatively static Dynamic
Handling of constraints In a ERP system, all the Simultaneous handling of the
demand, capacity and constraints
material constraints are
considered in isolation of
each other
Functionality Relatively less dynamic Can perform simulations of
as they are mainly adjustments with regard to the
concerned with constraints dynamically in real-
transaction processing time
and have more number
of jobs to do
Speed of processing Relatively slower Faster
requests

Basic components of Supply chain management

Supply chain management is the combination of art and science that goes into improving the way
your company finds the raw components it needs to make a product or service, manufactures that
product or service and delivers it to customers. The following are five basic components for
supply chain management.

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1. Plan : This is the strategic portion of supply chain management. You need a strategy for
managing all the resources that go toward meeting customer demand for your product or
service. A big piece of planning is developing a set of metrics to monitor the supply chain
so that it is efficient, costs less and delivers high quality and value to customers.
2. Source : Choose the suppliers that will deliver the goods and services you need to create
your product or service. Develop a set of pricing, delivery and payment processes with
suppliers and create metrics for monitoring and improving the relationships. And put
together processes for managing the inventory of goods and services you receive from
suppliers, including receiving shipments, verifying them, transferring them to your
manufacturing facilities and authorizing supplier payments.
3. Make : This is the manufacturing step. Schedule the activities necessary for production,
testing, packaging and preparation for delivery. As the most metric-intensive portion of
the supply chain, measure quality levels, production output and worker productivity.
4. Deliver :This is the part that many insiders refer to as "logistics." Coordinate the receipt
of orders from customers, develop a network of warehouses, pick carriers to get products
to customers and set up an invoicing system to receive payments.
5. Return : The problem part of the supply chain. Create a network for receiving defective
and excess products back from customers and supporting customers who have problems
with delivered products.

Proper SCM and inventory management require coordination of all of the different
activities and links in the supply chain. Successful coordination enables goods to move
smoothly and on time from suppliers to manufacturers to distributors to customers while keeping
inventories low and costs down.

Three flows of Supply Chain

The supply chain includes three flows: materials, information, and financial.
Materials flows: This encompasses physical products, new materials, supplies, and so forth that
flow along the chain, including returned products, recycled products, and disposal of material or
product.
Information flows: All data related to demand, shipments, orders, returns, schedules, and changes
in the aforementioned are information flows.
Financial flows: Financial flows include all transfers of money, payments, credit card
information and authorization, payment schedules, and e-payments.

For example, in the case of milk products, the process starts with several external suppliers that
move milk, cardboard, and plastic to the processing plant. After the milk is processed and
packaged, it is delivered to retailers, who sell it to customers. Not shown in the picture are
alternative delivery systems, such as delivery from a warehouse directly to customers’ homes.
Note that in service industries, no physical flow of materials occurs, but frequently there is flow
of documents (hard and soft copies). These, according to the definition given previously, are to
be considered supply chains, because the information flow and financial flow still exist. In fact,
the digitization of software, music, and so on results in a supply chain without physical flow.
Notice, however, that in such a case, there are two types of information flow: one that replaces
material flow (e.g., digitized software) and one that is the supporting information (orders, billing,

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etc.). In managing supply chains, it is necessary to coordinate all of the aforementioned types of
flows among all of the parties involved in the supply chain.

Material Flow
----------------------------------------------------------------à
Factory Planning Demand Planning
Supplier and and Scheduling S and Management Customers and
Service Procurement Collaboration C Demand Forecasting Channel
Providers Warehouse and Shipment M Demand Collaboration Partners
ß------------------------------------------------------------------
Information Flow
Supply chain management - delivering the right product to the right place, at the right time and at
the right price - is one of the most powerful engines of business transformation. It is one of the
leading cost saving and revenue enhancement strategies in use today.

Benefits of SCM
The main goal of modern SCM is to reduce uncertainty and risks in the supply chain, thereby
positively affecting inventory levels, cycle time, business processes, and customer service. These
benefits contribute to increased profitability and competitiveness. The benefits of supply chain
management have long been recognized in business and in the military. In today’s competitive
business environment, efficient, effective supply chains are critical to the survival of most
organizations, and they are greatly dependent upon the supporting information systems.

SCM software
Historically, many of the supply chain activities were managed with paper transactions,
which can be slow, error prone, and inefficient. Therefore, since the time when computers were
first used for business, people wanted to automate the supply chain processes. The first software
programs, which appeared in the 1950s and early 1960s, supported short segments along the
supply chain. Typical examples of these segments are inventory management systems,
scheduling, and billing. The supporting software was called supply chain management (SCM)
software. The major objectives were to reduce cost, expedite processing, and reduce errors. Such
applications were developed in the functional areas, independent of each other, and they became
more and more sophisticated with the passage of time. Of special interest were decision support
procedures such as management science optimization and financial decision-making formulas
(e.g., for finding appropriate order quantities). It quickly became clear that interdependencies
exist among some of the supply chain activities.

SCM software refers to software needed to support specific segments of the supply chain,
such as in manufacturing, inventory control, scheduling, and transportation. This software
concentrates on improving decision making, optimization, and analysis.

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Technologies such as the Internet, electronic data interchange, transportation and

warehouse management software, including software that manages plant scheduling, demand
forecasting, procurement, make SCM a versatile strategy to adopt.

e-Supply chain
When a supply chain is managed electronically, usually with Web-based software, it is
referred to as a digital supply chain or an e-supply chain. A digital supply chain can take many
shapes

The Internet has changed all that. It has transformed this old-fashioned process into
something closer to an exact science. An Internet-enabled supply chain helps companies
• avoid costly disasters
• reduce administrative overhead
• reduce unnecessary inventory (thereby increasing working capital)
• decrease the number of hands that touch goods on their way to the end customer
• eliminate obsolete business processes
• reap cost-cutting and revenue-producing benefits
• speed up production and responsiveness to consumers
• garner higher profit margins on finished goods

Supply Chain. Supply chain refers to the flow of materials, information, payments, and
services from raw materials suppliers, through factories and warehouses, to the end customers.
A supply chain also includes the organizations and processes that create and deliver
products, information, and services to the end customers. It is a network of activities that
delivers a finished product or service to the customer. It includes many tasks such as purchasing,
payment flow, materials handling, production planning and control, logistics and warehousing,
inventory control, and distribution and delivery.

Supply Chain Management. The function of supply chain management (SCM) is to

plan, organize, and coordinate all of the supply chain’s activities.Today, the concept of SCM
refers to a total systems approach to managing the entire supply chain. For an overview, see
Larson and Halldorsson (2003). SCM is usually supported by IT. (See Kumar, 2001; Hugos,
2002; and Vakharia, 2002.)

Supply chain planning modules can be placed into several categories – Order commitment,
Advanced scheduling, Demand planning, Distribution planning, and Transportation planning.
These modules help make better operating decisions. For e.g., they help determine how much of
a given product to manufacture in a certain time period, at what levels raw material and finished
goods inventories should be maintained, at which locations to store finished goods, and what
transportation made to use for product delivery.

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Supply chain execution – the process of fulfilling customer-specific needs for goods and value-
added services in a timely, efficient, and cost-effective manner – is a key differentiator in
increasingly competitive markets. Planning can cut costs by streamlining the procurement and
manufacturing processes, but that may not help satisfy customers. To keep customers happy,
companies must deliver as promised. Supply chain execution is composed of order planning
(order planning process – order entry and processing, order confirmation, and fulfillment
planning), production (inventory availability-schedule production, allocate inventory-priority
orders, production scheduling and production scheduling), replenishment (Production also
includes component replenishment strategies that minimize the amount of inventory in the
pipeline and coordinate product hand-offs between the various parties involved. Timely
replenishment of warehouses is critical because customers no longer tolerate out-of-stock
situations. Forecasting, aggregate inventory planning, capacity planning and MPS/Sourcing, and
distribution (distribution scheduling, pick and load, schedule home delivery, and customer
service).

Not just moving products, but managing information, and the ultimate cost-effectiveness of that
supply channel. The frictionless flow of information through the supply chain is a central part of
successful SCM. E.g., Dell Computer (“We already have a quick-ship plan for large customers,
where we can deliver a machine within 48 hours of an order” – the frictionless flow of
information through the supply chain is a central part of Dell’s vision.), Procter & Gamble
(P&G saved retail customers millions through supply chain efficiency gains. According to P&G,
the essence of its approach “lies in manufacturers and suppliers working closely
together…jointly creating business plans to eliminate the source of wasteful practices across the
entire supply chain”.

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