What is a Supply Chain

• A supply chain consists of all parties involved, directly or indirectly,

in fulfilling a customer request.
• A supply chain is dynamic and involves the constant flow of
information, product, and funds between different stages.
• The customer is an integral part of the supply chain.
Stages of a detergent Supply Chain

Kashif Shafiq
• Information

• Product

• Funds
Objective of a Supply Chain

• The objective of every supply chain should be to maximize the

overall value generated, the value of a supply chain generates is the
difference between what the final product is worth to the customer
and the costs the supply chain incurs in fulfilling the customers
request.
What is Supply Chain Management

• “It starts with customer and it ends with customer ,It requires looking at
your business as one continuous process”

• “It is about the management of relationships across complex networks of

companies that whilst legally independent are in reality interdependent”

• a chain of facilities and distribution alternatives that performs the

functions of obtainment of products, transformation of these products
into intermediate and finished goods, and the distribution of these
finished goods to customers.
 Drivers of Supply Chain Performance

• 1. Facilities:
– Are the actual physical locations in the supply chain network
where product is stored, assembled, or fabricated the two major
types of facilities are production sites and storage sites.
decisions regarding the role, location, capacity and flexibility of
facilities have a significant impact on the supply chains
performance.
• For instance, an auto parts distributor striving for responsiveness
could have many warehousing facilities located close to customers
even though this practice reduces efficiency. alternatively, a high
efficiency distributor would have fewer warehouses to increase
efficiency despite the fact that this practice will reduce
responsiveness.
• 2. Inventory:
– Encompasses all raw materials, work in process, and finish
goods within a supply chain. changing inventory policies can
dramatically alter the supply chains efficiency and
responsiveness. reducing inventory makes the retailer more
efficient but hurts its responsiveness.
• 3. Transportation:
– Entails moving inventory from point to point in the supply
chain. transportation can take the form of many combinations of
modes and routes, each with its own performance
characteristics.
• 4. Sourcing:
– Is the choice of who will perform a particular supply chain
activity such as production, storage, transportation or the
management of information. the strategic level, these decisions
determine what functions a firm performs and what functions
the film outsources.
• 5. Pricing:
– Determines how much a firm will charge for goods and services
that it makes available in the supply chain. Pricing affects the
behavior of the buyer of the good or service, thus affecting
supply chain performance.
• 6. Information:
• consists of data and analysis concerning facilities, inventory, transportation,
costs, prices, and customers throughout the supply chain. information is
potentially the biggest driver of performance in the supply chain because it
directly affects each of the other drivers.
 Cycle View of Supply Chain Processes

• The processes in a supply chain are divided into a series of cycles, each
performed at the interface between two successive stages of a supply chain.
• a cycle view of the supply chain clearly defines the processes involved and
the owners of each process.
Supply chain Process Cycles
Customer Order Cycle
Retailer

Replenishment Cycle Distributor

Manufacturer
Manufacturing Cycle

Supplier
Procurement Cycle
Push/Pull Views of Supply Chain Processes

• The processes in a supply chain are divided into two categories

depending on whether they are executed in response to a customer
order or in anticipation of customer orders. Pull processes are
initiated by a customer order, whereas push processes are initiated
and performed in anticipation of customer orders.
 Importance of outsourcing
• In the context of strategic supply chain management
 Benefits of outsourcing
1. Cost Savings
2. Focus on Core Business
3. Improved Quality
4. Customer Satisfaction
5. Operational Control
6. Staffing Flexibility
7. Continuity & Risk Management
8. Ease in starting new projects quickly
9. Accessibility to skilled expertise
10. Competitive edge
 Disadvantages of outsourcing
1. Loss Of Managerial Control
2. Hidden Costs
3. Threat to Security and Confidentiality
4. Quality Problems
5. Tied to the Financial Well-Being of Another Company
6. Bad Publicity and Ill-Will
Major tasks that are outsourced
Considerations when selecting an
outsourcing destination
• Costs
• Culture and Language
• Talent Pool
• Time Zone/Geographical Location
• Technology Infrastructure
• IP Protection and Legal Maturity
• Geopolitical Risks
• Local Considerations
Top 25 Outsourcing Destinations
– Tholons - 2016
Criteria to select outsourcing partner

• Geographical Location
• Quality
• Price • Reputation
• Delivery • Warranties and claim policies
• Service • Other Factors
• Technical Capability
• Financial Strength
 Best outsourcing service providers
[International association of outsourcing
professionals (IOAP) - 2016]

• Accelya
• Accenture
• Aegis Limited
• AGS Health Private Ltd
• Ajuba International
• Alorica
• Altisource
• Aon Hewitt
• Auriga
• Bell Integrator
• Canon Business Process
• Services
• CBRE
Top10 reasons why outsourcing fails

• Unclear objectives of outsourcing

• Unforeseen costs or rising costs
• No concurrent change in
workplace culture • Over
management/micromanagement
• Expectations are not set correctly
• Lack of communication • Changing buyer needs
• Transition processes need • Buyer behavior towards provider
improvement
• Inadequate risk analysis
Forecasting

Kashif Shafiq
The role of forecasting in a supply chain

• Demand forecasts form the basis of all supply chain planning. All
push processes in the supply chain are performed in anticipation of
customer demand, where as all pull processes are performed in
response to customer demand. For push processes, a manager
must plan the level of activity, be it production, transportation, or
any other planned activity. For pull processes, a manager must Plan
the level of available capacity and inventory but not the actual
amount to be executed. In both instances, the first step a manager
must take is to forecast what customer demand will be.

Kashif Shafiq
• Mature products with stable demand, such as milk or paper towels,
are usually easiest to forecast. Forecasting and the accompanying
managerial decisions are extremely difficult when either the supply of raw
materials or the demand for the finished product is highly unpredictable.
Fashion goods and many high-tech products are examples of items that
are difficult to forecast.
• Good forecasting is very important in these cases because the time
window for sales is narrow. If a firm has over-or under produced, it has
little chance to recover. For a product with stable demand, in contrast. The
impact of a forecasting error is less significant.

Kashif Shafiq
 Characteristics of forecasts

• Forecasts are always wrong and should thus include both the expected
value of the forecast and a measure of forecast error.
• Long-term forecasts are usually less accurate than short-term forecasts.
• Aggregate forecasts are usually more accurate than disaggregate forecasts,
as the tend to have a smaller standard derivation of error relative to the
mean.
• In general, the farther up the supply chain a company is (or the farther it is
from the consumer), the greater is the distortion of information it
receives.

Kashif Shafiq
 Forecasting methods and types

• Qualitative: Qualitative forecasting methods are primarily subjective

and rely on human judgment. They are most appropriate when
little historical data is available or when experts have market
intelligence that may affect the forecast. Such methods may also
be necessary to forecast demand several years into the future in a
new industry.
• Time-series: Time-series forecasting methods use historical demand
to make a forecast. They are based on the assumption that past
demand history is a good indicator of future demand. These
methods are most appropriate when the basic demand pattern
does not vary significantly from one year to be next. These are the
simplest methods to implement and can serve as a good starting
point for a demand forecast.

Kashif Shafiq
• Causal: Causal forecasting methods assume that the demand forecast
is highly correlated with certain factors in the environment(the state
of the economy, interest rates, etc.). Causal forecasting methods find
this correlation between demand and environmental factors and use
estimates of what environmental factors will be to forecast future
demand. For example. Product pricing is strongly correlated with
demand. Companies can thus use causal methods to determine the
impact of price promotions on demand.

• Simulation: Simulation forecasting methods imitate the consumer

choices that give rise to demand to arrive at a forecast. using
simulation, a firm can combine time-series and causal methods to
answer such questions as: What will be the impact of a price
promotion? What will be the impact of a competitor a store nearby?
Airlines simulate customer buying behavior to forecast demand for
higher-fare seats when there are no seats available at the lower fares.
 Basic approach to demand forecasting

• Six-step approach helps an organization perform effective forecasting

• Understand the objective of forecasting

• Integrate demand planning and forecasting throughout the supply chain

• Understand and identify customer segments

Kashif Shafiq
Basic approach to demand forecasting Contd.

• Identify the major factors that influence the demand forecast

• Determine the appropriate forecasting techniques

• Establish performance and error measures for the forecast

INVENTORY CONTROL
 What is Inventory?
• Inventory is a stock of items held to meet future
demand.

• The stock of any item or resource used in an

organization and can include: raw materials, finished
products, component parts, supplies, and work-in-
process

• Single largest asset on the balance sheet

• Accounts for 40-60% of current assets

• Helps to improve ROI & working capital

 What is Inventory?
• You should visualize inventory as stacks of
money sitting on forklifts, on shelves, and in
trucks and planes while in transit. That’s what
inventory is—money. For many businesses,
inventory is the largest asset on the balance
sheet at any given time, even though it is
often not very liquid.
The Purpose of Inventory

So why do you need inventory?

 The Purpose of Inventory
• In environments where an organization suffers
from poor cash flow or lacks strong control
over
– (i) electronic information transfer among all
departments and all significant suppliers
– (ii) lead times
– (iii) quality of materials received

• inventory plays important roles.

 The Purpose of Inventory
• Fluctuations in demand

– A supply of inventory on hand is protection: You

don’t always know how much you are likely to
need at any given time, but you still need to
satisfy customer or production demand on time.
 The Purpose of Inventory
• Unreliability of supply
– Inventory protects you from unreliable suppliers
or when an item is scarce and it is difficult to
ensure a steady supply.
 The Purpose of Inventory
• Price protection
– Buying quantities of inventory at appropriate times
helps avoid the impact of cost inflation. Note that
contracting to assure a price does not require actually
taking delivery at the time of purchase.

– Many suppliers prefer to deliver periodically rather

than to ship an entire year’s supply of a particular
stock keeping unit ( SKU) at one time.

– The acronym “SKU,” standing for “stockkeeping unit,”

is a common term in the inventory world. It generally
stands for a specific identifying numeric or alpha-
numeric identifier for a specific item.
 The Purpose of Inventory
• Quantity discounts
– Often bulk discounts are available if you buy in
large rather than in small quantities.
– For example, an electric jigsaw might normally
cost $10 per unit. If you order 300 or more saws at
one time, your supplier may lower the cost to
$8.75.

• Lower ordering costs

– If you buy a larger quantity of an item less
frequently, the ordering costs are less than buying
smaller quantities over and over again.
 The Purpose of Inventory
• Geographical Specialization
– It allows geographical positioning across multiple
manufacturing & distributive units of an
enterprise.

• Decoupling
– Allows EOS within a single facility & permit each
process to function at max efficiency rather than
having the speed of the entire process constrained
by the slowest
Inventory Hides Problems

Bad
Design
Lengthy Poor
Setups Quality
Machine
Inefficient Unreliable
Breakdown
Layout Supplier
 To Expose Problems:
Reduce Inventory Levels

Bad
Design
Lengthy Poor
Setups Quality
Machine
Inefficient Unreliable
Breakdown
Layout Supplier
 Inventory Costs
• Dollars

• Space

• Labor to receive, check quality, put away,

retrieve, select, pack, ship, and account for

• Deterioration, damage, and obsolescence

• Theft
 Inventory Carrying Costs
• Inventory carrying cost is the expense associated
with maintaining inventory.

• Inventory expense is calculated by multiplying

annual inventory carrying cost percent by average
inventory value.

• Assuming an annual inventory carrying cost

percentage of 20 percent, the annual inventory
expense for an enterprise with $1 million in
average inventory would be $200,000 (20% x
$1,000,000).
 Inventory Carrying Costs
• While the calculation of inventory carrying
expense is basic, determining the appropriate
carrying cost percent is less obvious.

• Determining carrying cost percent requires

assignment of inventory-related costs.

• Financial accounts relevant to inventory carrying

cost percent are capital, insurance, obsolescence,
storage, and taxes.
 Inventory Carrying Costs
• Capital Cost
– The appropriate charge to place on capital
invested in inventory varies widely.
– Any funds invested in inventory lose their earning
power, restrict capital availability, and limit other
investment.
– For example, if a firm expects a 20 percent
before-tax return on invested capital, similar logic
suggests that capital tied up in inventory should
be assessed or charged the same 20 percent.
 Inventory Carrying Costs
• Taxes
– Taxing authorities typically assess inventory held
in warehouses. The tax rate and means of
assessment vary by location. The tax expense is
usually a direct levy based on inventory level on a
specific day of the year or average inventory level
over a period of time.
 Inventory Carrying Costs
• Insurance
– Insurance cost is an expense based upon
estimated risk or loss over time.
– Loss risk depends on the product and the facility
storing the product.
– For example, high-value products that are easily
stolen and hazardous products result in high
insurance cost.
– Insurance cost is also impacted by facility
characteristics such as security cameras and
sprinkler systems that might help reduce risk.
 Inventory Carrying Costs
• Obsolescence
– Obsolescence cost results from deterioration of
product during storage.
– A prime example of obsolescence is product that
ages beyond recommended sale date, such as
food and pharmaceuticals.
– Obsolescence also includes financial loss when a
product becomes obsolete in terms of fashion or
model design.
 Inventory Carrying Costs
• Storage
– Storage cost is facility expense related to product
holding rather than product handling.
– Storage cost must be allocated on the
requirements of specific products since it is not
related directly to inventory value.
Inventory Carrying Costs
 Ordering Cost/Setup Cost
• Ordering Costs : incurred when ordering more
inventory and when setting up to go into production to
fill the order

• Used in calculating order quantities, the costs that

increase as the number of orders placed increases.

• It includes the costs related to the clerical work of

preparing, releasing, monitoring and receiving orders,
the physical handling of goods, inspections and setup
costs.”
 Cost of Backorders
• Backorders, lost sales, lost customers : A
backorder, also known as stock-out, is an
unfilled customer order or commitment
 Inter-Relationship of Inventory,
Operating Cost, & Service
• Inventory, Operating Cost, & Service Levels are
inherently tied to one another.

• Focus on reducing two of the three, without process

change, negatively impact the remaining.

• For example focusing on reducing operating cost

means pursuing increased efficiency through larger
batch sizes to reduce flush & setup cost. This typically
increases lead times due to manufacturing constraints,
which in turn require larger safety stocks (increased
inventory) to cover demand variability.
 Inter-Relationship of Inventory,
Operating Cost, & Service
– Focus on Operating Cost and Service Levels will
increase Inventory Cost
– Focus on Inventory Cost and Service Levels will
increase Operating Cost
– Focus on Operating Cost and Inventory Cost will
decrease Service Levels

• Inventory Management Process balances

inventory and operating cost to achieve a
specified Service Level Agreement at the lowest
total cost.
 Inventory Management
• Supply chain has limited capacity and thus it
takes time to replenish the goods that are sold.

• Inventory Management is the process that

controls the availability of products and raw
materials and manages supply and demand
variability.

• It is the discipline of keeping the right material at

the right place at the right time.
 Inventory Management
• The purpose of Inventory Management Process (IMP) is to
consistently and effectively manage finished product and raw
material inventories in Manufacturing & Distribution Units.

• The standard process delivers the most economic inventory, based

on the variability of individual SKUs at each sales location, to ensure
full compliance with agreed to Customer Service Level Agreements.

• The economic inventory level balances inventory cost &

manufacturing cost.

• Customer Service Level Agreements are negotiated to manage

inventory by specifying On-Time-In-Full (OTIF) and Lead Time
requirements.
 Inventory Management
• Inventory levels are dependent on:
– Customer Service Level Agreements (OTIF & Lead
Times)
– Supply Planning Strategies
– Number of Stocking Points
– Manufacturing & Distribution Lead Times
– Demand Variability
– Forecast Accuracy
– Balance of cost saving to increase batch sizes versus
increased cost of inventory
 Inventory Control Models
• PP&C techniques like MRP are too complicated
for small companies

• An alternative is to have simple inventory

control system
– Where inventory is replenished using some
mechanism as it is consumed
 Re-Order Cycle Control (ROCC)

• Level of inventory of an item is checked periodically;

also known as review period
– High turnover items require frequent checking
– Longer the review period and more is the risk

• A replenishment order is placed for a sufficient qty to

bring the inv level to a target level

• This is also known as Periodic Inventory System

 Re-Order Point Control
• The level of inventory of an item is checked each time
any item is issued

• If the inv. level has fallen to the re-order point, an

order is placed for a pre-determined reorder qty
(ROQ)

• It is also known as continuous or perpetual inventory

system
Independent Demand

vs

Dependent Demand
 Independent Demand vs Dependent Demand

• Independent Demand : demand for a stand

alone product such as motorcycle, car etc.

• Dependent Demand : Exists only because of

demand for something else such as demand
for motorcycle tire is dependent upon the
demand for the motorcycles
 Independent Demand vs Dependent Demand

• The demand for the number of chairs you need is

independent from the number of tables that you
need because quantity required is influenced by
the demand in the market for each item.

• The demand for chair legs or seats is

mathematically dependent on the demand for
finished chairs.

• Four legs and one seat are required for each

chair.
 Independent Demand vs Dependent Demand

• Independent demand calls for a replenishment

approach to inventory management.

• This approach assumes that market forces will

exhibit a somewhat fixed pattern.

• Therefore, stock is replenished as it is used in

order to have items on hand for customers.
 Independent Demand vs Dependent Demand

• Dependent demand calls for a requirements approach.

• When an assembly or finished item is needed, then the

materials needed to create it are ordered.

• There is no fixed pattern because an assembly created

in the past may never be produced again.

• The nature of demand, therefore, leads to different

concepts, formulae, and methods of inventory
management.
 Independent Demand vs Dependent Demand

• Independent demand
– Uncertain / forecasted
– Continuous Review / Periodic Review

• Dependent demand
– “Requirements” / planned
– Materials Requirements Planning / Just in Time

71
 Economic Order Quantity
• It shows how we can balance the various costs of
stock to answer the question, ‘How much should
we order?’

• The approach is to build a model of an idealized

inventory system and calculate the fixed order
quantity that minimizes total costs.

• This optimal order size is called the economic

order quantity (EOQ).
 Economic Order Quantity (EOQ)
Model

Assumptions of the Basic EOQ Model:

• Demand rate D is constant, recurring, and known

• Amount in inventory is known at all times
• Ordering (setup) cost S per order is fixed
• Lead time L is constant and known.
• Unit cost C is constant (no quantity discounts)
• Annual carrying cost is i time the average $ value
of the inventory
• No stock outs allowed.
• Material is ordered or produced in a lot or batch
and the lot is received all at once

74
 EOQ Inventory Order Cycle
Demand
Order qty, Q
Inventory rate
Level

ave = Q/2

Reorder point, R

0 Lead Lead Time

time time
As Q increases, Order Order Order Order
average inventory
level increases, but
Placed ReceivedPlaced Received
number of orders
placed decreases 75
 EOQ Model Costs

S = cost of placing order D = annual demand

H = annual per-unit carrying cost Q = order quantity
Annual ordering cost = SD/Q Annual carrying cost = HQ/2
Total cost = SD/Q + HQ/2 Q* = Economic Order Quantity

76
Total Cost of Inventory – EOQ Model

77
 EOQ Example 1

If D = 1,000 per year, S = $62.50 per order, and H =

$0.50 per unit per year, what is the economic
order quantity?

2DS
Q* 
H
2 * 1000 * 62.5

0.5
 500

78
 Introduction
• From a financial point of view, inventory is an
asset and represents money that is tied up and
cannot be used for other purposes.

• As we know, inventory has a carrying cost—the

costs of capital, storage, and risk.

• Finance wants as little inventory as possible and

needs some measure of the level of inventory.

• Total inventory investment is one measure, but in

itself does not relate to sales.
 Introduction
• Two measures that do relate to sales are the
inventory turns ratio and days of supply:

– Inventory turns
– Days of supply
 Inventory Turns
• Ideally, a manufacturer carries no inventory.

• This is impractical, since inventory is needed to support

manufacturing and often to supply customers.

• How much inventory is enough? There is no one

answer.

• A convenient measure of how effectively inventories

are being used is the inventory turns ratio:

• Inventory turns =annual cost of goods sold / average inventory in dollars

 Inventory Turns
• For example, if the annual cost of goods sold is $1
million and the average inventory is $500,000, then
• Inventory turns =$ 1,000,000 / $ 500,000
=2

• What does this mean?

• At the very least, it means that with $500,000 of

inventory a company is able to generate $1 million in
sales.

• If, through better materials management, the firm is

able to increase its turns ratio to 10, the same sales are
generated with only $100,000 of average inventory.
 Days of supply
• Days of supply is a measure of the equivalent
number of days of inventory on hand, based
on usage.

• The equation to calculate the days of supply

is:
• Days of supply= inventory on hand / average daily usage
 Value of Stock
• Organizations need accurate values for their
assets – including stock – as this directly affects
their reported performance.

• Any errors can bring serious consequences. For

example, if the valuation of stocks is too low then
a company may appears to have fewer assets
than it really has.

• This may give an artificially high return on assets,

and in extreme cases allows the company to be
bought at a fraction of its true value.
 Value of Stock
• Actual cost
– identifies each unit in stock with the price actually paid for it.

• First-In-First-Out (FIFO)
– This assumes that the first units arriving in stock are the first
sold, so the value of remaining stock is set by the amount paid
for the last units bought.

• Last-In-First-Out (LIFO)
– assumes that the latest units added to stock are used first, so
the value of remaining stock is set by the amount paid for the
earliest units bought.

• Weighted average cost

– finds the average unit cost over a typical period
DIFFERENT METHODS OF INVENTORY
ANALYIS
 ABC Analysis
• Another useful set of accounting information comes from
an ABC analysis.

• Inventory control can take a lot of effort and so for some

items, especially cheap ones, this effort is not worthwhile.

• Very few organizations, for example, include routine

stationery or coffee in their formal stock systems.

• At the other end of the scale are very expensive items that
need special care above the routine calculations.

• It would be useful to find the amount of effort worth

putting into the control of any item.

• An ABC analysis gives some guidelines for this.

 ABC Analysis of Stocks
• The origin of the ABC analysis – sometimes called
Pareto analysis, or the ‘rule of 80–20’

• In inventory control terms it means that 20 per

cent of the inventory items need 80 per cent of
the attention, while the remaining 80 per cent of
items need 20 per cent of the attention.

• In particular, ABC analyses define the following:

– A items are the few most expensive ones that need
special care.
– B items are ordinary ones that need standard care.
– C items are the large number of cheap items that
need little care
 ABC Analysis of Stocks
• Typically an organization might use an
automated system to deal with all B items.

• A items are more important, and although the

automated system might make some
suggestions, managers make the final
decisions after a thorough review of
circumstances.

• C items are very cheap and are usually left out

of the automatic system, to be dealt with by
ad-hoc procedures.
 ABC Analysis of Stocks
• An ABC analysis starts by taking each item and
multiplying the number of units used in a year by
the unit cost.

• This gives the total annual use of items in terms

of value.

• Usually, a few expensive items account for a lot of

use, while many cheap ones account for little use.

• If we list the items in order of decreasing annual

use by value, A items are at the top of the list and
C items are at the bottom.
ABC Analysis of Stocks
 VED ANALYSIS
• Based on critical value & shortage cost of an item
–It is a subjective analysis.
•Items are classified into:
Vital:
•Shortage cannot be tolerated.
Essential:
•Shortage can be tolerated for a short period.
Desirable:
Shortage will not adversely affect, but may be using more
resources. These must be strictly Scrutinized

V E D ITEM COST

A AV AE AD CATEGORY 1 10 70%

B BV BE BD CATEGORY 2 20 20%

C CV CE CD CATEGORY 3 70 10%

CATEGORY 1 - NEEDS CLOSE MONITORING & CONTROL

CATEGORY 2 - MODERATE CONTROL.
CATEGORY 3 - NO NEED FOR CONTROL
SDE ANALYIS
Based on availability
Scarce
Managed by top level management
Maintain big safety stocks
Difficult
Maintain sufficient safety stocks
Easily available
Minimum safety stocks
FSN ANALYSIS
Based on
utilization.
Fast moving.
Slow moving.
Non-moving.
Non-moving
items must
be
periodically
reviewed to
prevent
expiry
&
obsolescence
HML ANALYSIS
Based on cost per unit
Highest
Medium
Low
This is used to keep
control over
consumption
at departmental level for
deciding the frequency of
physical verification
Supply Chain Performance:
Achieving
Strategic Fit and Scope
Outline

• Competitive, Product and Supply chain strategies

• Strategic fit
• Achieving Strategic Fit
• Tailoring the supply chain strategic fit
• Expanding Strategic Scope
• Challenges to achieving strategic fit
 • the set of customer needs a firm seeks to satisfy thr
Competitive its products and services in relative to its customers
• For example: Walmart competitive strategy is value
strategy money and product availability while McMaster focu
responsiveness instead of low price

specifies the portfolio of new products that the

company will try to develop

Product
Development
strategy

• determines the nature of material procurement,

Supply chain transportation of materials, manufacture of product or
creation of service, distribution of product
strategy • For example: Dell initially decided to sell computers dire
and in 2007 it decided to sell through resellers
The Value Chain: Linking Supply Chain and Business Strategy

FINANCING, ACCOUNTIONG, INFORMATION TECHNOLOGY, HUMAN

RESOURCE

NEW PRODUCT
MARKETING OPERATIONS
DEVELOPMEN DISTRIBUTION
AND SALES
T
 STRATEGIC FIT

Competitive
strategy

Aligned
goals
Supply chain
strategy
 ACHIEVING STRATEGIC FIT:
Step 1- Understanding the customer and supply chain uncertainty:
A company must understand the needs of the customers and the uncertainty they impose on
supply chain

.
Response
time

Innovati
on Service
Level

Customer
demand
variations

Lot size
Price
 Step 2: Understanding Supply Chain Capabilities
How does the firm best meet demand in uncertain situations?

Handle
Meet short
excessive
lead time
products

Respond to
Build
excess
innovative
quantity
products
demanded

Handle supply Supply chain High service

uncertainty responsiveness level
 Cost to achieving responsiveness
Supply chain efficiency: cost of making and delivering the product to the customer
The cost-responsiveness efficient frontier curve shows the lowest possible cost for a given level
of responsiveness.
 Achieving strategic fit:
The final step that is achieving strategic fit
involves following steps:
• Ensure that the degree of supply chain
responsiveness is consistent with the implied
uncertainty.
• Assign roles to different stages of the supply
chain that ensure the appropriate level of
responsiveness.
• Ensure that all functions maintain consistent
strategies that support the competitive strategy.
Step 3: Achieving Strategic Fit
Comparison of Efficient and Responsive Supply Chains
Efficient Responsive
Primary goal Lowest cost Quick response
Product design strategy Min product cost Modularity to allow
postponement
Pricing strategy Lower margins Higher margins
Manufacturing strategy High utilization Capacity flexibility
Inventory strategy Minimize inventory Buffer inventory
Lead time strategy Reduce but not at expense Aggressively reduce even
of greater cost if costs are significant
Supplier selection Cost and low quality Speed, flexibility, quality
strategy
Transportation strategy Greater reliance on low Greater reliance on
cost modes responsive (fast) modes
 Tailoring the supply chain strategic fit
A company making multiple products and serving different customer segments has to design a
tailored supply chain that is able to be efficient when implied uncertainty is low and responsive
when it is high.
For example:
Levis Strauss sells both customized and standard jeans. It tailors its supply chain to meet both
sets of needs.
Important in industries where innovation is critical and product move through a lifecycle
Supply chain strategy must evolve throughout the life cycle
• Beginning: uncertain demand, high margins (time is important), product availability is most
important, cost is secondary
• Later : predictable demand, lower margins, price is important
As the product goes through the life cycle, the supply chain changes from one
emphasizing responsiveness to one emphasizing efficiency
 Expanding Strategic Scope

Scope of strategic fit – the functions within the firm and stages a
supply chain that devise an integrated strategy with an aligned o

One extreme : Other extreme:

each function at each stage develops all functions in all stages
its own strategy strategy jointly
 FIVE CATEGORIES TO EXPAND STRATEGIC SCOPE
Intraoperation scope
Intrafunctional view
Interfunctional scope
Intercompany scope
Agile intercompany scope
minimize local cost view:
Each stage of the supply chain
devises strategy independently
minimize total functional cost:
Firms align all operations within a
function
maximize company profit:
Functional strategies are developed to
align with one another and
the competitive strategy
maximize supply chain surplus:
Supplier and customer work together
and share information to
reduce total cost and grow supply
chain surplus
a firm’s ability to achieve strategic
fit when partnering with supply chain
stages that change over time
CHALLENGES TO ACHIEVING AND MAINTAINING
STRATEGIC FIT:

Increasing product Globalization and

variety and increasing
shrinking life cycles uncertainty

Changing
Fragmentation of
technology and
supply chain
business
ownership
environment

The environment
and sustainability
TRANSPORTATION AS A DRIVER OF
SUPPLY CHAIN MANAGEMNET
PERFORMANCE
 Transportation Modes
• Trucks
-TL(Truckload), LTL(Less Than Truckload)
• Rail
• Air
• Package Carriers
• water
• Pipeline
• Internet
• Intermodal
 Truckload (TL)
• Low fixed and variable costs

• Major issues
-Utilization
-consistent service
-Backhauls

• Economies of scale regarding distance travelled

• Suited for transportation between manufacturing

facilities and warehouses, or between suppliers and manufacturers
 LTL
Less Than Truckload
• Higher fixed costs (terminals) and low variable costs

• Pricing to encourage small lots, less than half TL

• Slower than TL

• Economies of scale for quantity shipped as well as distance

travelled

• Suited for shipments too large to mail but less than half a TL

• Major issues:
-Location of consolidation facilities
-Utilization
-Vehicle routing
-customer service
 Rail
• High fixed costs

• Suited for large, heavy or high-density products over

long distances

• Ideal for very heavy, low value shipments that are not
very time sensitive

• Key issues:
-Scheduling to minimize delays/improve service
-Off-track delays(at pickup and delivery end)
-Yard operations
-Variability of delivery times
 Air
• Large fixed costs and relatively low variable costs

• Ideal for small, high-value items or time sensitive

emergency shipments, normally less than 500lbs.

• Key issues:
-Location/number of hubs
-Location of fleet bases/crew bases
-Schedule optimization
-Fleet assignment
-Crew scheduling
-Yield management
 Package Carriers
• Companies like FedEx, UPS, USPS, and DHL that carry small packages ranging from
letters to shipments of about 150 pounds

• Expensive

• Rapid and reliable delivery

• Small and, time-sensitive shipments

• Preferred mode for e-businesses (e.g., Amazon, Dell,

McMaster-Carr)

• Consolidation of shipments (especially important for

package carriers that use air as a primary method of
transport)
 Water
• Limited to certain geographic areas

• Ocean, inland waterway system, coastal waters

• Very large loads at very low cost

• Slowest

• Dominant in global trade(autos, grain, apparel, etc.)

• Key issues:
-port congestion
-Delays at ports,-customs, and security
-Management of containers
 Pipeline
• High fixed cost

• Primarily for crude petroleum, refined

petroleum products, natural gas

• Best suited for large and predictable demand

 Internet
• Low fixed cost
• Music, Movies
• Fast delivery time
• Inexpensive method of delivery
 Intermodal
• Use of more than one mode of transportation to move a shipment to its destination

• Most common example: rail/truck

• Also water rail/truck or water/truck

• Grown considerably with increased use of containers

• Increased global trade has also increased use of intermodal

transportation

• More convenient for shippers (one entity provides the

complete service)

• Key issue involves the exchange of information to facilitate

transfer between different transport modes
Discovering Potential Suppliers
• Supplier websites
• Supplier information files
• Supplier Catalogs
• Trade Registers and Directories
• Trade Journals
• Phone Directories
• Filing Of Mailing Pieces

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Discovering Potential Suppliers
• Sales Personnel
• Trade Shows
• Company Personnel
• Other Supply Management Department.
• Professional Organization

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Evaluating Potential Suppliers
• Supplier Surveys
• Financial Conditions Analysis
• Third Party Evaluators
• Evaluation Conference
• Facility Visits
• Quality Capability Analysis
• Capacity Capability Analysis

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Evaluating Potential Suppliers
• Management Capability Analysis
• Service Capability Analysis
• Flexibility Capability Analysis
• Information Technology Capability Analysis

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Selecting Suppliers
• Bidding versus Negotiation
• Pre requisites to Bidding
• Conditions Demanding Negotiation.

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Single versus Multiple Sourcing
• Lower total cost results from a much higher volume(economies of
scale)
• Quality consideration dictate
• The buying firm obtains more influence-clout-with the supplier
• Lower costs are incurred to source, process, expedite and inspect.

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Single versus Multiple Sourcing
• The quality control and coordination required with just in time
manufacturing require a single source
• Significantly lower freight costs may result
• Special tooling is required and the use of more than one supplier is
impractical or excessively costly.

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Dual or Multiple Sourcing
• To protect the buying firm during times of shortages, strikes, and
other emergencies.
• To maintain competitions and provide a backup source. To meet
local or intent requirements for international manufacturing
locations.
• To meet customer’s volume requirements.
• To avoid lethargy or complacency on the part of a single-source
supplier

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Dual or Multiple Sourcing
• When the customer is a small player in the market for a specific
item.
• When the technology path is uncertain
• In areas where suppliers tend to leapfrog each other technologically

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 Importance of outsourcing
• In the context of strategic supply chain management
Enterprise Resource Planning Systems
 Materials Requirement Planning
• Materials requirement planning was the initial software
development in manufacturing information systems. MRP systems
use information from bills of material, master production schedules,
and on-hand inventories to compute time-phased planned order
releases of dependent demand items. MRP links the internal
operations of an organization, such as purchasing, production,
inventory control and material planning, to improve purchasing ,
production, and delivery performance.

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• MRP systems do not provide feedback information, nor do they
analyze the impact of changes in “production levels on financial
results. The development of closed-loop MRP was a natural
extension of the MRP system. It was an attempt to further develop
the MRP into a formal and explicit manufacturing planning and
control system by adding capacity requirements planning and
feedback to describe the progress of orders being manufactured.
Today, the originally developed MRP is a part of the closed-loop
MRP system.

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 Manufacturing Resource Planning
• Manufacturing resource planning (MRP-II) was the next
development in MRP and was an out growth of the closed-loop
MRP system. Business and sales plans were incorporated ,and a
financial function was added to link financial management to
operations, marketing and other functional areas. The concept of
manufacturing resource planning was that the information system
should link internal operations to the financial function to provide
management with up-to-date data, including sales, purchasing,
production, inventory, and cash flow. It should also be able to
perform “what—if” analyses as internal and conditions change.

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The development of Enterprise resource planning
systems

• While traditional or legacy MRP systems continue to be used and modified

to include other functional areas of an organization, the emergence and
growth of supply chain management, e-commerce, and global operations
have created the need to exchange information directly with suppliers,
Customers, and foreign branches of organizations. the concept of the
manufacturing information system thus evolved to directly connect all
functional areas and operations of an organization and, in some cases, its
suppliers and customers via a common software infrastructure and
database. This type of manufacturing information system is now
commonly referred to as ERP.

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• The typical ERP system is an umbrella system that ties together a variety of
specialized systems, such as production and inventory planning,
purchasing, logistic, human resources, finance, accounting, customer
relationship management, and supplier relationship management.

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Generic ERP system

Operations

Sales and
Engineering
Marketing

Central
Customer
Database
Supplier relationship
and Servers Management
Relationship
Management
Finance and
Human Accounting
resources Head
quarters
and
Branches

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Implementing Enterprise Resource Planning
Systems
• Implementing an ERP system has been proven to be a real
challenge for many companies. Two primary requirements of
successful implementation of ERP are computer support and
accurate, realistic inputs. Instead of complete implementation of
the entire system at once, some firms choose to implement only
those application or modules that are absolutely critical to
operations at that time. Additional modules are then added in a
preplanned second phase. This ensures that the system can be
implemented as quickly as possible while minimizing interruption
of the existing system. However, many implementations have still
failed due to variety of reasons. Some of the more common
reasons for failed ERP implementations follow:

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• Lack of top management commitment: while management may be
willing to set aside sufficient funds to implement a new ERP system, it
may not take an active role in providing ongoing encouragement during
the implementation process. Often, this lead users to revert to the old
processes or systems because of their lack of knowledge and interest to
learn the capabilities of the new ERP system.

• Lack of adequate resources: Implementing a new ERP system is a long

term commitment requiring substantial capital investment. Although
the cost has become more affordable due to the rapid advent of
computer technology, full implementation may still be out of reach for
many small organizations. In addition, small firms may not have the
necessary workforce and expertise to implement the complex system.

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• Lack of proper training: many employees may already be familiar
with their legacy MRP systems. Thus, when a new ERP system is
implemented, top management may assume that users are already
adequately prepared and underestimate the training required to
get the new system up running. Lack of financial resources can also
reduce the amount of training available for its workforce.

• Lack of communication: lack of communication within an

organization and/or between the firm and its ERP software provider
can also be a major hindrance for successful implementation. Lack
of communication usually results in the wrong specifications and
requirements being implemented.

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• Incompatible system environment: In certain cases, the firm’s
environment does not give ERP a distinct advantage over other systems.
For example, there is no distinct advantage for a small family-owned used
car dealer in a small town to implement an expensive new ERP system.
Advantages Of Enterprise Resource Planning
Systems
• The primary advantage of ERP over the legacy MRP system is that
ERP uses a single database and a common software infrastructure
to provide a broader scope and up-to-date information, enabling
management to make better decisions that can benefit the entire
supply chain.
• ERP helps organizations reduce supply chain inventories due to the
added visibility throughout the entire supply chain.
• ERP systems also help organizations to standardize manufacturing
processes.

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• ERP enables an organization, especially a multi-business-unit enterprise,
to efficiently track employees’ time and performance and to communicate
with them via a standardized method.
Disadvantages of enterprise resource planning
system
• A substantial capital investment is needed to implement the system.
considerable time and money must be set aside to evaluate ERP
software applications and their suppliers, to purchase the
necessary hardware and software, and then to train employees to
operate the new system.

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• The software is designed around a specific business model based on
specific business processes. Although business processes are usually
adopted based on best practices in the industry. The adopting firm must
change its business model and associated processes to fit the built-in
business model designed into the ERP system. Thus, the adopting firm
must restructure its processes to be compatible with the new ERP system.
This has resulted in a very unusual situation where a software system
determines the business practices and processes a firm should implement,
instead of designing the software to support existing business practices
and processes.

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 Enterprise Resource Planning Software
Applications
• Although each ERP software provider configures its products
differently from its competitors, some common modules of ERP
systems are described here:

• Accounting and finance: This module assists an organization in

maintaining financial control and accountability. It tracks
accounting and financial information such as revenues, costs,
assets, liabilities, and other accounting and financial information of
the company.

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• Customer relationship management: This module provides the
capability to manage customers. It enables collaboration between
the organization and its customers by providing relevant,
personalized, and up-to-date information. it also enables customers
to track sales orders.
• Human resource management: It assists an organization to plan, develop,
and control its human resources. It allows the firm to deploy the right
people to support its overall strategic goals and to plan the optimal
workforce levels based on production levels.

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• Manufacturing: It schedules materials and tracks production,
capacity, and the flow of goods through the manufacturing process.
It may even include the capability for quality planning, inspection,
and certifications.

• Supplier relationship management: This module provides the

capability to manage all types of suppliers. It automates processes
and enables the firm to more effectively collaborate with all its
suppliers corporate-wide. It also monitors supplier performance
and tracks delivery of goods purchased.

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• Supply chain management: This module handles the planning,
execution, and control of activities involved in a supply chain. It
assists the firm to strengthen its supply chain networks to improve
delivery performance. It may cover various logistics functions,
including transportation, warehousing, and
inventory management. In this context, supply chain management
refers to logistics management in which the focus is the distribution
of finish goods. The supply chain management module creates
value by allowing the user to optimize its internal and external
supply chains. Effective supply chain management requires the
organization to have comprehensive management information
systems to synchronize plans with customers and suppliers,
collaborate in real time, execute plans, handle changes, and
measure supply chain performance.

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Enterprise Resource Planning Software Providers
• Choosing an appropriate ERP software package can be a very
challenging task SAP, Oracle, PeopleSoft, J.D. Edwards, and Baan
are among the most popular ERP providers.
• SAP AG
SAP AG, a German firm, is the world’s leading ERP software provider and
world’s third-largest software provider. Its flagship product is known as R/3.
more than 17,500 organizations in 120 countries have used its products-
including major multinational firms such as Baxter Healthcare, Chevron,
Colgate—Palmolive, Exxon, IBM, and Microsoft. Five former IBM system
engineers founded SAP in 1972. The company employs about 28,000 people in
more than fifty countries. It is headquartered in Walldorf; Germany, with U.S.
operations headquartered in Newtown Square, Pennsylvania. One of SAP’s
latest product offerings is the mySAP business suite, a family of business
solution, and an integration and application platform

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• Oracle
– The Oracle Corporation” was founded in the late 1970s by Larry Ellison,
Bob Miner, and Ed Oates. The focus of the company has been to provide
business applications that utilize relational databases for storing
information. Oracle technology is used in nearly every industry around the
world and in almost all Fortune 100 companies. Today, Oracle continues to
be the world’s leading supplier of information management software. It is
the world’s second largest software company, after Microsoft. However, it
is ranked behind SAP in the sales of ERP applications. Oracle was one of
the first software companies to develop and deploy 100 percent Internet-
enabled enterprise software across its entire product line. Today, Oracle
serves over 13,000 customers running its applications.

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• PeopleSoft
– PeopleSoft, Inc., headquartered in Pleasanton, California, was founded
by Dave Duffield and Ken Morris in 1987. The primary focus Of the
Company has been to build client/server business applications instead
of focusing on applications for the traditional mainframe computers.
PeopleSoft’s first product was a human resources application on a
client-server platform introduced in 1988. Today, the company is a
leader in the human resources application market. PeopleSoft serves
customers around e globe, including Analog Devices, corning, Cyber
International, PepsiAmericas, and Sprint.

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• J. D. Edwards
– J. D. Edwards,” founded in 1977 by Jack Thompson, Dan Gregory, and Ed
McVaney, is headquartered in Denver, Colorado. It is one of the world’s
leading developers of agile software solutions, providing cutting-edge,
collaborative technology that runs global businesses and integrates
processes across multiple systems and supply chain partners. J. D. Edwards
designs all of its software solutions to be open, scalable, and flexible, so
that they can be integrated with software applications from other vendors.
Their business-to-business software applications enable users to engage in
collaborative commerce with their customers, supplies, and other supply
chain partners.

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• Baan
– Baan was founded in 1978, with headquarter in the Netherlands and a
current work-force of approximately 2,800 employees serving a
worldwide customer base. Baan designed its application based on a
framework of open, flexible, and easy-to-configure components that
allow individual applications to be configured to different industry
processes. Baan provides application solutions to more than 15000
customer sites worldwide.

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