1a.

Introduction to SCM

BIA 674 – Supply Chain Analytics

Today’s learning objectives
1. Understand the importance of supply chains in a firm’s
financial performance and for the economy as a whole.
2. Discuss the goal of a supply chain and explain the
impact of supply chain decisions on the success of a
firm.
3. Identify the key supply chain decision phases and
explain the significance of each one.
4. Describe the cycle and push/pull views of a supply
chain.
5. Classify the supply chain macro processes in a firm.
 Why is SCM important?
% of Revenue

Best-in-class Companies’ Outperform Their Median Competitors with a

50% Cost Advantage
Superior SCM has long been a source of competitive
3 advantage
Source: PRTM/The Performance Measurement Group
Especially in times of economic
uncertainty
• US business logistics amount to about 10% Fortune-10 Company
Supply-Chain Cost as
of US nominal Gross Domestic Product 3 % of Total Costs 2
• Supply-chain generally accounts for between GM 94%
60% and 90% of all company costs1 Ford 93%
Conoco 90%
• A 2% improvement in process efficiency for
Wal-Mart 90%
supply-chain processes has 3000% - 5000%
Chevron 88%
the impact of a 2% improvement in
IBM 77%
efficiency for… IT… HR… Finance1… Sales…
Exxon 75%
GE 63%

1 Exclusive of Financial Services companies

Citi1 0%
2 Source: Hoovers 2006 Financial Data, Supply-Chain Council 2006 SCM
Benchmark data on SCM cost for discrete & process industries AIG1 0%
3 CSCMP 19th Annual State of the Logistics Industry

Focused initiatives in Supply Chain Management can result in 30-35% cost

reductions, liberation of working capital,
Oil &and
Gas Decrevenue
2009 4 increases of 3-5%!
 Definition of SCM
Supply Chain Management (SCM)
 SCM is a set of approaches used to integrate
suppliers, manufacturers, warehouses and customers
so that merchandise is produced and distributed at the
right quantities, to the right locations and at the right
time, in order to minimize system wide costs while
satisfying service-level requirements.

Logistics
+ Energy-aware
Optimization

Network Design Supply-Chain Management

+ + +
Other definitions
 Supply Chains are the Totality of processes spanning
operations from supplier to end-customer, focused on
material, work and information flow (Supply Chain
Council)
 A Supply Chain is the alignment of firms that brings
products or services to the market (Lambert et.al.)
 A Supply Chain is a set of three or more units
(organizations or individuals) directly involved in the
upstream and downstream flows of products, services,
finances and/or information from a source to a customer
What is a Supply Chain?
 All stages involved, directly or indirectly, in fulfilling a
customer request – the key driver of the SC
 Includes manufacturers, suppliers, transporters,
warehouses, retailers, and customers
 Includes multiple levels of suppliers, and multiple levels
of retailers and customers
 Within each company, the supply chain includes all
functions involved in fulfilling a customer request (e.g.
product development, marketing, operations,
distribution, finance, customer service)
 These functions need to be completely aligned!
Example: A detergent supply chain

Remember: in addition to materials’ flows, there are flows of

information and funds. You can draw a network for the transfer of
funds across the above stages.
Key characteristics of a Supply Chain
 Customer is an integral part of the supply chain
 Includes movement of products from suppliers to
manufacturers to distributors and information, funds,
and products in both directions
 May be more accurate to use the term “supply network”
or “supply web”
 Typical supply chain stages: customers, retailers,
distributors, manufacturers, suppliers
 All stages may not be present in all supply chains (e.g.,
no retailer or final distributor for Dell)
 In addition to materials’ flows, there are also flows of
information and funds
 Upstream vs. Downstream supply chain
 Stages & Flows in a Supply Chain

 Each stage is connected through the flow of products, information & funds
 The appropriate design depends on customers’ needs and roles @ the various
stages
 Remember: Dell maintains 2 supply chain structures
 Remember: difference between retail networks in USA vs India
 Supply Chains can be global

Heaney, B (2011), Supply

Chain Visibility Excellence
– Fostering Security,
Resilience, and
Efficiency, Aberdeen
Group, March 2011
What is required to build a laptop?

Morisson M. It’s a Global Economy: The supply chain for laptops &
educational resources, 2012
 The Objective of a Supply Chain

 Maximize overall value (supply chain surplus) created

Supply Chain Surplus

= Customer Value – Supply Chain Cost

Maximum amount the customer Cost to fulfill the

is willing to pay for a product customer request

The difference between the value

of the product and its price
is the consumer surplus
The Objective of a Supply Chain
 Example: a customer purchases a wireless router from
Best Buy for $60 (revenue)
 Supply chain incurs costs (information, storage,
transportation, components, assembly, etc.)
 Difference between $60 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
 Success should be measured by total supply chain
profitability, not profits at an individual stage
The Objective of a Supply Chain
 Customer the only source of revenue
 Actually, it is also the only reason for the SC to exist
 Sources of cost include flows of information, products, or
funds between stages of the supply chain
 Effective supply chain management is the management of
flows between and among supply chain stages to maximize
total supply chain surplus
 Total profitability is the key criterion for performance
measurement
 Difference in retailing between USA (largely consolidated
around a few major chains) and India (with millions of small
retail outlets)
Importance of Supply Chain Decisions

 Supply chain design, planning and operation

decisions play a significant role in the success
or failure of a firm.

 To stay competitive, supply chains must adapt

to changing technology and customer
expectations
Decision Phases of a SC
1. Supply chain strategy or design
 How to structure the supply chain over the next several
years and how resources will be allocated
 Anticipate market conditions over the next few years
2. Supply chain planning
 Decisions over the next quarter or year
 Incorporate any flexibility build in the supply chain during the
design phase to optimize performance
3. Supply chain operation
 Daily or weekly operational decisions
 Exploit the reduction of uncertainty and optimize performance
1. SC Design
 Decisions about the structure/configuration of the
supply chain and what processes each stage will
perform
 Strategic supply chain decisions:
 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
2. SC 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
2. SC Planning decisions
 Planning decisions:
 Which markets will be supplied from which locations
 Planned buildup of inventories
 Subcontracting, backup locations
 Inventory policies
 Timing and size of market promotions
 Must consider in planning decisions demand
uncertainty, exchange rates, competition over
the time horizon
3. SC 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 implement the operating policies as effectively
as possible
 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)
Process View of a SC
 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)
Cycle View
of SC Processes

The supply chain

is a concatenation
of cycles with each
cycle at the
interface of two
successive stages
in the supply
chain.
Sub-processes in each SC cycle

Each cycle
involves the
customer
placing an
order and
receiving it
after it has
been
supplied by
the supplier.
Differences among the cycles
 Each cycle has the same basic sub-processes, however:
 Predictability of orders - in the customer order cycle
demand is external and thus uncertain, while orders in
the procurement cycle are predictable once
manufacturing planning has been done.
 Number and size of orders - the size increases as we
move further from the end customer and the number of
orders decline)
 The cycle view clearly defines the roles/owners and the
processes involved – crucial for operational decisions
 This is the predominant view for ERP systems. It is a transaction
level view and clearly defines each process and its owner.
Push/Pull View of Supply Chains

 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
Push/Pull View of Supply Chains
Push/Pull View of Supply Chains
 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
 Uncertainty makes the difference!
Push/Pull View of – L.L. Bean
Push/Pull View – Dell (for customized orders)
SC Macro Processes
 Supply chain processes discussed in the two
views can be classified into
 Customer Relationship Management (CRM)
 Internal Supply Chain Management (ISCM)
 Supplier Relationship Management (SRM)
 Integration among the above three macro
processes is critical for effective and successful
supply chain management
 SC Macro Processes

Suppler Relationship Internal SC Customer Relationship

Relationship

 Importance of COORDINATION between Purchasing, Manufacturing

and Marketing