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Supply Chain Management

Supply Chain
Management
Gunjan Soni
Gunjan Soni
ITEB G621
ITEB G621
LECTURE 1
LECTURE 1
1
Typical Supply Chain

INFORMATION FLOW

Transfer Transfer Transfer Transfer

Supplier Manufacturing Distribution Retail Outlet Consumer

CASH FLOW

Supply Chain Optimization

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Reasons for Supply Chain Management
Changing Consumer Buying Patterns
• increased number of SKU's
• alternative shopping formats

Evolving Shortened Cycle


Trade/Channel Times
Complexity • speed is critical
• polarization of • baseline service
markets requirements
• micro marketing

Shift in Balance of Power Increased Demand for


• changing brand/store Value-Added Programs
loyalty • VMI
• retailer exerting greater • custom packs/displays
influence
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Source: AC Consulting
Supply Chain
Management

Chapter 1
Understanding the Supply Chain

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UNIT -1

 UNDERSTANDING THE SUPPLY CHAIN

 SUPPLY CHAIN DRIVERS AND METRICES

 CASES FROM DIFFERENT INDUSTRIES

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Terminology

 Physical Distribution Management


 Materials Management
 Logistics Management
 Supply Chain Management (SCM)

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Logistics
 Term logistics has been used to describe the
component of warfare associated with the
transport of soldiers, industrialism, & the
modern market system
 At the beginning of century “ physical
distribution” was used to define the activities
 Over course of century it was called as Business
Logistics, logistics of distribution & materials
management

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Logistics in pre-historic times
 Early logistics aroused due to surplus grains,
raw materials, or manufacture could be traded
for scarcer commodities
 Market demand occurred in barter form

 Transaction occurred in bulk and purchaser


made arrangement for movement
 Logistics were simpler with consumer and
producer interacting directly
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Modern Industrial Era
 Before industrial rev. products were unique hand crafted
objects
 Later products got standardized & improvement in finance,
law, & commercial structures
 Producers lost their primary character & got involved in
problems of production
 Mass prodn. , economies of scale & mass customization of
standardized goods got essential
 Growth boosted by new national & international markets
 Producer & consumer got distant

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Logistics got important!!!!
 Separation by time & space of producer
& consumer
 Specialized middleman & transportation
services grew
 Alternate modes of distribution
developed
 Structure of commercial exchange
emerged involving wholesaler, retailer &
customer 10
Logistics Management

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Supply chain management (SCM)
According to counsel of logistics management (CLM) SCM
is “an integrating function with primary responsibility for
linking major business functions and business processes
within and across companies into a cohesive and high-
performing business model. It includes all of the Logistics
Management activities noted earlier, as well as
manufacturing operations, it drives coordination of
processes activities within and across marketing, sales,
product design, finance and information technology"

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Recent Success Story of SCM
Indian Oil Corporation Limited (IOCL) has implemented Honeywell’s Supply
Chain Management solution to integrate and optimize the supply chain of five
separate refineries. The project has resulted in the following benefits:

 Integrated supply chain planning which optimizes the entire supply chain providing
higher margins and increased profitability,
 Crude selection and allocation which takes into account product demands, refinery
capabilities and effect of crudes already procured,
 Optimal refinery production planning considering crude assays, unit capacities, product
specifications and demands; and feedstock availability.
 Optimal distribution planning considering transportation costs, taxes and duties and
transportation constraints

Source:
http://hpsweb.honeywell.com/Cultures/enUS/NewsEvents/SuccessStories/success_
IOCL.htm
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Logistics : A subset of SCM
SUPPLY CHAIN MANAGEMENT
•Managing relationship
•Integration through IT
•Collaborative alliance
•Vendor evaluation
•Purchasing strategies
•Outsourcing
•B2B & B2C transactions

Logistics
Procurement
Manufacturing
Distribution
Waste disposal

Drivers
Transportation
Inventory
Facilities
Information
Sourcing 14
Pricing
Evolution of Supply Chain Management

Ballou (2005)

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Traditional View: Logistics in the
Manufacturing Firm

 Profit 4% Profit
Logistics
Cost

 Logistics Cost 21% Marketing


Cost

 Marketing Cost 27%


Manufacturing
Cost
 Manufacturing Cost 48%
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Outline
 What is a Supply Chain?
 Decision Phases in a Supply Chain
 Process View of a Supply Chain
 The Importance of Supply Chain Flows
 Examples of Supply Chains

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What is a Supply Chain?

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What is Supply Chain?
 Flow of information, products, funds in
upstream and downstream
 May consist of more than one players at each
tier/stage
 May be a chain or group of chains called supply
network or supply web
 Not necessary that all the players exist in a
supply chain

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Flows in a Supply Chain

Information

Product
Customer
Funds

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Think it over

 What if one or more supply chain member is


malfunctioning?????????

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The Objective of a Supply Chain
 Maximize overall value created
 Supply chain value: difference between what the
final product is worth to the customer and the
effort the supply chain expends in filling the
customer’s request
 Value is correlated to supply chain profitability
(difference between revenue generated from the
customer and the overall cost across the supply
chain)
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The Objective of a Supply Chain
 Example: Dell receives Rs. 60,000 from a
customer for a laptop (revenue)
 Supply chain incurs costs (information, storage,
transportation, components, assembly, etc.)
 Difference between Rs.60,000 and the sum of all
of these costs is the supply chain profit
 Supply chain profitability is total profit to be
shared across all stages of the supply chain
 Supply chain success should be measured by
total supply chain profitability, not profits at an
individual stage 23
The Objective of a Supply Chain
 Sources of supply chain revenue: the customer
 Sources of supply chain cost: flows of
information, products, or funds between stages
of the supply chain
 Supply chain management is the
management of flows between and among
supply chain stages to maximize total
supply chain profitability

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Effect of Environment
 Decisions for SCM vary from environment to
environment
 Eg: Different structure of SC will need diverse SC
decisions . FMCG goods SC in US and India have
separate SC structures .

US India
Consolidated Retailing Scattered , large no. of
retailers
Need of distributor is almost Distributor plays a major
nullified role
Large orders, less frequent Small orders, frequent
replenishment replenishment

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Decision Success & Failures: Instances

 Success: Wal-Mart (Daily Commodities), Dell


Computer, 7-11( Fast food & Services)

 Failure: Webwan ( Grocery), Quaker Oat’s


( Sport Drink) acquisition of Snapple in 1994.

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Decision Phases of a Supply
Chain
 On the basis of frequency with which they are
made and time frame they take into account

 SUPPLY CHAIN STRATEGY OR DESIGN


 SUPPLY CHAIN PLANNING

 SUPPLY CHAIN OPERATION

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Supply Chain Strategy or Design
 Decisions about the structure of the supply chain
and what processes each stage will perform
 Strategic supply chain decisions like:
 Locations and capacities of facilities
 Products to be made or stored at various locations
 Modes of transportation
 Information systems

 Supply chain design must support strategic


objectives
 Supply chain design decisions are long-term and
expensive to reverse – must take into account
market uncertainty 28
More SC strategic decisions
 Chain’s configuration
 Resource allocation
 Processes at each stage
 Sourcing
 Location of facilities
 Product allocation regarding manuf. & storing
 Modes of transportation
 Type of information system

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Supply Chain Planning
 Definition of a set of policies that govern short-
term operations
 Fixed by the supply configuration from previous
phase
 Starts with a forecast of demand in the coming
year
 Time frame is quarter to an year
 Define set of operating policies that govern
short-term operations.
 Must consider in planning decisions demand
uncertainty, exchange rates, competition over
the time horizons 30
SC Planning Decisions
 Market allocation
 Subcontracting of manufacturing
 Inventory policies
 Timing & Size of marketing and pricing
promotions
 Level of flexibility to be incorporated

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Supply Chain Operation
 Time horizon is weekly or daily
 Decisions regarding individual customer orders
 Supply chain configuration is fixed and operating
policies are determined
 Goal is to exploit reduction in uncertainty and
optimize performance
 Allocate orders to inventory or production, set
order due dates, generate pick lists at a
warehouse, allocate an order to a particular
shipment, set delivery schedules, place
replenishment orders
 Much less uncertainty (short time horizon) 32
SC Operation
 Inventory & Production allocation to orders
 Scheduling of orders
 Generate pick list at the warehouse
 Order allocation to shipping mode & shipment
 Setting delivery schedule
 Placing replenishment orders

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Process View of a Supply Chain
 Cycle view: processes in a supply chain are
divided into a series of cycles, each performed at
the interfaces between two successive supply
chain stages
 Push/pull view: processes in a supply chain are
divided into two categories depending on
whether they are executed in response to a
customer order (pull) or in anticipation of a
customer order (push)
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Cycle View of Supply Chains
Customer
Customer Order Cycle

Retailer
Replenishment Cycle

Distributor

Manufacturing Cycle

Manufacturer
Procurement Cycle
Supplier
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Cycle View of a Supply Chain
 Each cycle occurs at the interface between two
successive stages
 Customer order cycle (customer-retailer)
 Replenishment cycle (retailer-distributor)
 Manufacturing cycle (distributor-manufacturer)
 Procurement cycle (manufacturer-supplier)
 Cycle view clearly defines processes involved and
the owners of each process. Specifies the roles and
responsibilities of each member and the desired
outcome of each process.
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Customer Order Cycle
 Involves all processes directly involved in
receiving and filling the customer’s order
 Customer arrival
 Customer order entry
 Customer order fulfillment
 Customer order receiving

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Replenishment Cycle
 All processes involved in replenishing retailer
inventories (retailer is now the customer)
 Retail order trigger
 Retail order entry
 Retail order fulfillment
 Retail order receiving

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Manufacturing Cycle
 All processes involved in replenishing
distributor (or retailer) inventory
 Order arrival from the distributor, retailer, or
customer
 Production scheduling
 Manufacturing and shipping
 Receiving at the distributor, retailer, or customer

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Procurement Cycle
 All processes necessary to ensure that materials
are available for manufacturing to occur according
to schedule
 Manufacturer orders components from suppliers
to replenish component inventories
 However, component orders can be determined
precisely from production schedules (different
from retailer/distributor orders that are based on
uncertain customer demand)
 Important that suppliers be linked to the
manufacturer’s production schedule
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Push/Pull View of Supply Chains
Procurement, Customer Order
Manufacturing and Cycle
Replenishment cycles

PUSH PROCESSES PULL PROCESSES

Customer
Order Arrives
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Push/Pull View of
Supply Chain Processes
 Supply chain processes fall into one of two
categories depending on the timing of their
execution relative to customer demand
 Pull: execution is initiated in response to a
customer order (reactive)
 Push: execution is initiated in anticipation of
customer orders (speculative)
 Push/pull boundary separates push processes
from pull processes
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Push/Pull View of
Supply Chain Processes
 Useful in considering strategic decisions relating
to supply chain design – more global view of
how supply chain processes relate to customer
orders
 Can combine the push/pull and cycle views
 L.L. Bean
 Dell

 The relative proportion of push and pull


processes can have an impact on supply chain
performance 43
The Importance of Supply
Chain Flows
 Close connection between design and
management of supply chain flows (product,
information, and cash) and supply chain success
 Dell: success
 Quaker Oats (Snapple): failure
 Supply chain decisions can play a significant role
in the success or failure of a firm

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Macro Process in a Supply Chain
Supplier Internal Supply Customer
Relationship Chain Relationship
Management Management management
Source Strategic Market

Negotiate planning Price

Buy Demand Sell

Design
Planning Call Center
Collaboration Supply Planning
Order
Supply Fulfillment Management
Collaboration Field Service

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Examples of Supply Chains
 Dell / Compaq
 Toyota / GM / Ford
 McMaster Carr / W.W. Grainger
 Amazon / Borders / Barnes and Noble
 Webvan / Peapod / Jewel

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Gateway: A Direct Sales
Manufacturer
 Why did Gateway have multiple production facilities in the
US? What advantages or disadvantages does this strategy
offer relative to Dell, which has one facility?
 What factors did Gateway consider when deciding which
plants to close?
 Why does Gateway not carry any finished goods inventory
at its retail stores?
 Should a firm with an investment in retail stores carry any
finished goods inventory?
 Is the Dell model of selling directly without any retail stores
always less expensive than a supply chain with retail stores?
 What are the supply chain implications of Gateway’s
decision to offer fewer configurations? 47
7-Eleven
 What factors influence decisions of opening and closing
stores? Location of stores?
 Why has 7-Eleven chosen off-site preparation of fresh food?
 Why does 7-Eleven discourage direct store delivery from
vendors?
 Where are distribution centers located and how many stores
does each center serve? How are stores assigned to
distribution centers?
 Why does 7-Eleven combine fresh food shipments by
temperature?
 What point of sale data does 7-Eleven gather and what
information is made available to store managers? How
should information systems be structured?
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W.W. Grainger and McMaster
Carr
 How many DCs should there be and where should they
be located?
 How should product stocking be managed at the DCs?
Should all DCs carry all products?
 What products should be carried in inventory and what
products should be left at the supplier?
 What products should Grainger carry at a store?
 How should markets be allocated to DCs?
 How should replenishment of inventory be managed at
various stocking locations?
 How should Web orders be handled?
 What transportation modes should be used? 49
Toyota
 Where should plants be located, what degree of
flexibility should each have, and what capacity
should each have?
 Should plants be able to produce for all
markets?
 How should markets be allocated to plants?
 What kind of flexibility should be built into the
distribution system?
 How should this flexible investment be valued?
 What actions may be taken during product
design to facilitate this flexibility?
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Summary of Learning Objectives
 What are the cycle and push/pull views of a
supply chain?
 How can supply chain macro processes be
classified?
 What are the three key supply chain decision
phases and what is the significance of each?
 What is the goal of a supply chain and what is
the impact of supply chain decisions on the
success of the firm?
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Amazon.com
 Why is Amazon building more warehouses as it grows? How many
warehouses should it have and where should they be located?
 What advantages does selling books via the Internet provide? Are
there disadvantages?
 Why does Amazon stock bestsellers while buying other titles from
distributors?
 Does an Internet channel provide greater value to a bookseller like
Borders or to an Internet-only company like Amazon?
 Should traditional booksellers like Borders integrate e-commerce
into their current supply?
 For what products does the e-commerce channel offer the greatest
benefits? What characterizes these products?

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Assignment
 Maximum Weight age 10-20%
 Project in form of single time assignment
 One type of assignment has to be chosen by
student from among the following :
a) Case Study (C)
b) Computer based assignment ( making a software
tool – simulation /optimization tool) (S)
c) Fundamental Research based assignment (F)
d) Mathematical Modeling (M)
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