Supply Chain Management

Chapter 3
Logistics Management
Vinod V Sople
Chapter 1
Logistics Management
Satish Ailawadi
Rakesh Singh

Contents
Basic concept

Definition

Origin / Evolution of SCM

Scope

Role of Logistics in Supply Chain

Comparison between logistics & supply chain management

Global supply chain scenario & importance

Supply chain participants

Channel Agencies / Channel types and structure

Relationship management

Concept of extended enterprises

Bull whip effect

Collated from presentation by Darshana, Pooja, Mimansha & Parvati
[LSRC TYBMS 2011 Div ]

Basic Concept

Globalization has created competition in the markets of

globalized economies across the world
Business organizations across the world have realized that

Business process of satisfying customers is of critical

importance to them

Competition today has shifted from products to supply

chain

Supply chain of one firm is competing with that of another

to deliver superior customer value
Hence effectively & efficiently managing the supply chain
has become critical not just for growth but for the survival of
any business
3

Supply Chain Management [SCM]

Definition
The process of planning, organizing, and controlling the
flow of materials & services from suppliers to end
users / customers. This integrated approach
incorporates suppliers, supply management, integrated
logistics, and operations
SCM is the management of a network of interconnected
businesses involved in the ultimate provision of product
and service packages required by end customers
SCM is the integration of key business processes
across the supply chain for the purpose of creating
value for customers and stakeholders
- Global Supply Chain Forum - Lambert, 2008
4

... Supply Chain Management [SCM]

... DEFINITION

SCM encompasses the planning and management of all

activities involved in sourcing, procurement, conversion,
and logistics management
- Council of Supply Chain Management Professionals
(CSCMP)

Strategic concept that involves understanding and

managing the sequences of activities from suppliers to
customers that add value to the product and supply
chain pipeline
- Prof Lisa Elram and Maratha C. Cooper
5

... Supply Chain Management [SCM]

Only for
understanding.
Not required for
exam

... Supply Chain Management [SCM]

A supply chain is a set of organizations directly linked

by one or more of the upstream and downstream flows
of products, services, finances, and information from a
source to a customer

Involves the flow of physical goods and associated

information from the source to the consumer

Key supply chain activities include production planning,

purchasing, materials management, distribution,
customer service, and sales forecasting

Managing a supply chain is 'supply chain management'

7

... Supply Chain Management [SCM]

SCM involves all movement and storage of raw

materials, work-in-process inventory, and finished
goods from point of origin to point of consumption
across the supply chain

It also includes the crucial components of coordination

and collaboration with channel partners, which can be
suppliers, intermediaries, third-party service providers,
and customers

SCM integrates supply and demand management

within and across companies

... Supply Chain Management [SCM]

Many Indian firms today have implemented supply

chain initiatives to develop a competitive
advantage in the globalized, privatized and
liberalized [GPL] environment

Some of these firms Modi Xerox, Telco, Maruti

Udyog, Sunderam Fasteners and Godrej

Read supply chain initiatives from Logistics

Management Sople pg 37

Origin / Evolution of SCM

10

... Origin / Evolution of SCM

After the 1st industrial revolution, organizations were

following the factory system

Focused on bringing in efficiencies in the shop floor

Every department was isolated

Hostile relationships were observed with other business

partners such as suppliers, wholesalers & dealers

The 2nd industrial revolution which happened in the form of

the Toyota Production System in Japan brought about

The concept of JIT

Pull-based systems which improved production &

inventory control

A revolution in production systems

11

... Origin / Evolution of SCM

Purchasing activities made a great deal of

improvements

Buyer did more than negotiate deals & buy

components from supplier

Supplier was given the status of business partner

Concepts of collaborative development emerged

Resulted in many improvements such as working

together to solve problems, improving quality &
cost control

12

... Origin / Evolution of SCM

Organizations

Moved further into the procurement cycle assisting their

suppliers in dealings with their suppliers which naturally
created a SCM system

Understood that their suppliers were in turn dependent

on their suppliers

Their quality, costs and delivery reliability had an impact

on them as well

Simultaneously organizations started adopting computers

Over the years MRP, MRP-II and ERP emerged

Helped integrate functional areas and business partners

through sharing of information
13

... Origin / Evolution of SCM

The organization started evolving as one entity

In the 1980s, the term Supply Chain Management
[SCM] was developed to express the need to integrate
the key business processes, from end user through
original suppliers
SCM is the resultant of the unified evolution of
manufacturing management & logistics management
The concept of logistics management itself evolved from
unified evolution of materials management & sales
management

14

... Origin / Evolution of SCM

Basic idea behind the SCM

Companies and corporations involve themselves in a supply

chain by exchanging information regarding market
fluctuations and production capabilities

If information is available to every company in the supply

chain, each company can work towards improving processes

Leads to better planned overall production and distribution

which can cut costs

More attractive final products can be provided leading to

better sales & better overall results for each of the
companies involved

Incorporating SCM successfully leads to a new kind of

competition on the global market where competition is no longer
of the company versus company form but rather takes on a
supply chain versus supply chain form
15

Role of Logistics in Supply Chain

Supply chain helps in creating time & place utilities of

products which are important for customer satisfaction
Supply chain will help the firm make the product available

At the right place

With channel efficiency & effectiveness

This is greatly dependent on logistics

All components of logistics such as transportation,
warehousing, inventory control and information systems
integrate the supply chain, so as to make available the right
quantity of products at the right place
The supply chain is the place of transaction of a firm's
products & acts as the interface between the firm & the
customer

16

... Role of Logistics in Supply Chain

The effectiveness of this interface is dependent on the

efficiency of logistics operations to speedily move products
in the required quantity, of the required type
Logistics operations are tuned to the needs of the supply
chain members to reduce loss of sales opportunities
Thus the basic role of logistics in the supply chain is to
ensure smooth movement of products, to make them
available at the distribution outlet, at the time required by
the customer

17

Differences Between Logistics & SCM

18

... Differences Between Logistics & SCM

19

Global Supply Chain Scenario & Importance

Globalization has created competition in the markets of

globalized economies across the world
Worldwide new markets have opened up & existing markets are
expanding
Economies of industrialized countries have matured
Firms from industrialized countries are seeking growth
opportunities abroad
Firms are sourcing, manufacturing & distributing on a worldwide
basis resulting in global production & global distribution
Thus global companies are seeking

Growth by extending their markets abroad

Cost reduction through scale economies in purchase &

production

20

... Global Supply Chain Scenario & Importance

Governments across the world have

Initiated liberalization & privatization
Given support for increasing trade
Over the years nations have come together to form
Organizations such as World Trade Organization [WTO]
Trade blocs such South Asian Association for Regional
Cooperation [SAARC] and European Union [EU]
The underlying logic behind this trade
An organization can buy materials from several suppliers in
different countries
Manufacture in one country & sell in another country or
countries
Improvements in transportation, communication, financial
arrangements, 3PLs and 4PLs further enable global trade
21

... Global Supply Chain Scenario & Importance

Factors that encourage international trade

Growing demand in new markets

Demand for foreign products

Removal of trade barriers

Manufacturers sourcing globally

Manufacturers aiming for economies of scale

Integration of supply chains

Specialized support in the form of 3PLs & 4PLs

Changing logistics such as containerization &

postponement
Improved business communication through EDI

22

... Global Supply Chain Scenario & Importance

Globalization encourages international trade but makes

managing a global supply chain and coordinating the logistics
functions a complicated task
e.g. Nike an American Company that makes sports shoes for
their basketball shoe 'Air Max Penny'

Designed the shoe in Oregon & Tennessee jointly by Asian

& American & South Korean designers

Sources 52 components through companies in Japan,

South Korea, Taiwan, Indonesia and USA

Manufactures men's size shoes in South Korea and boy's

size shoes in Indonesia

Primary distribution of Nike products in USA & Europe is

through 3PLs

23

... Global Supply Chain Scenario & Importance

In this scenario to manage the supply chain,

organizations need to take into consideration the
following factors

Overall costs

Overall outsourcing plan

Process of supplier selection

Manufacturing plant location selection

Transportation

Warehousing strategies

Overall distribution plan

24

Participants in a Supply Chain

Key participants in the supply chain

Suppliers

Manufacturers

Distributors

Customers

25

... Participants in a Supply Chain

Suppliers
AKA Vendors
Organizations that provide goods / services to a purchasing
organization
Key material decisions
Location
Capacity
Lot sizes viz how much to make in a production run
Inventory (mainly raw material)
Key information & related decisions
Customer orders
Costs, market prices
EDI
26

... Participants in a Supply Chain

Manufacturers

AKA OEMs
Firms engaged in the original production & assembly of products &
services
Key material decisions
Location
Capacity
Sourcing of resources such as labor, material, power & machines
Lot sizes viz how much to make in a production run
Inventory (raw material, work-in-progress and finished goods)
Key Information & Related Decisions
Supplier shipments
Customer orders
Costs
Market prices
27

... Participants in a Supply Chain

Distributors
External entities that sell for suppliers or manufacturers and often
collect all payments from customers
Maintain an inventory of the manufacturers' product lines
Key material decisions
Location
Inventory (finished goods)
Key information & related decisions
Customer orders
Shipments from Warehouses / Distribution Centers
Market prices
Customers
End receivers or users of the product or services
Essential part of the supply chain as they are the ultimate
28
consumers of the firms' products & services

Channel Agencies
Information Flow

29

Channel Structures

30

... Channel Structures

FMCG companies have a very long & dense channel structure because
customers are very large in number & spread over wide geographical area
Unit product price is low & frequency of purchase is very high
Hence FMCG companies prefer to have more outlets to satisfy customer
needs

31

... Channel Structures

In case of machineries, manufacturers prefer to deal directly with

the customer because of the product complexities, high unit price,
pre and after-sales service requirements
Whatever the channel structure, the width & depth of risk at each
level is different and depends on the financial involvement and
control over the next lower level
The channel structure enables the physical flow of products from
manufacturer to the end customer which is taken care by logistics
Requires close coordination between channel tasks and logistics
operations
Information flow in the channel is two-directional
Manufacturer sends information such as order status, material
availability, shipping dates, transportation mode, payments due
etc
32

... Channel Structures

Channel members send information on customer requirements,

sales forecast, warranty claims, competition activities,
requirements scheduling etc
For movement of goods from manufacturer to channel
partners, logistics department acts like the traffic cop in the
supply chain
Logistics activities such as order registration, order processing,
inventory planning, order picking, packaging & transportation
require a continuous flow of information
Information flow activates the material flow across the channel
The channel structure enables the transfer of ownership of
goods as they pass through the supply chain
Timely flow of funds from channel members to the
manufacturers is important to keep the operations going

33

Relationship Management

Relationship management is a relatively new label

applied to an old & fundamental area of business
Since the beginning of commercial activity, managers
have been concerned with developing customer &
supplier relationships
New thrust behind popularity of relationship management
stems from the belief successful business
arrangements are most likely to result when participating
firms cooperate in planning & executing performance

Emphasis on cooperation represents shift from

managing relationships on the basis of power-driven
adversarial approaches
34

... Relationship Management

Underlying principle

All parties in the SC will be better off if emphasis is

focused on joint problem s0lving to improve overall
efficiency & effectiveness

Ultimately results in synergy leading to highest level

of joint achievements

35

Extended Enterprise

Is a loosely coupled, self-organizing network of

firms that combine their economic output to provide
products and services offerings to the market

Also referred to as a supply chain or a value

chain

The extended enterprise describes the

community of participants involved with
provisioning a set of service offerings

Firms in the extended enterprise may operate

independently or cooperatively through
agreements and contracts
36

... Extended Enterprise

e.g. The extended enterprise associated with "McDonald's"

includes

McDonald's Corporation

Franchisees

Joint venture partners

3PLs that provide food and materials to McDonald's

restaurants

Advertising agencies that produce and distribute

McDonald's advertising

Suppliers of McDonald's food ingredients, kitchen

equipment, building services, utilities, and other goods
and services, the designers of Happy Meal toys, and
others

37

... Extended Enterprise

Members of the extended enterprise exchange of information,

goods, services and money
Concept of extended enterprise has taken on more importance
because

Firms have become more specialized and inter-connected

Trade has become more global, processes have become more

standardized and information sharing

The standardization of business processes has permitted

companies to purchase as services many of the activities that
previously had been provided directly by the business
By outsourcing certain business functions such as transportation,
warehousing, procurement, public relations, information
technology, that had been previously self-provided, firms have
been able to concentrate their core competencies which determine
the firm's unique value proposition
38

Bullwhip Effect
Definition

Is the phenomenon wherein small

changes in demand at the demand end
of a supply chain get amplified as
information flows upstream
The amplification of the demand variance up the
supply chain, from the customer to factory, as demand
information passes through the supply chain
The amplification of information distortion as order
information travels up the supply chain

AKA Whiplash effect

Term coined by management of Procter & Gamble

39

... Bullwhip Effect

Phenomenon observed in forecast driven distribution

channels

Change in demand moves backward in the form of

amplified oscillations upstream resembling the flick of a
whiplash

Effect indicates a lack of synchronization among supply

chain members

40

... Bullwhip Effect

41

... Bullwhip Effect

Customer demand is rarely perfectly stable

Hence businesses must forecast demand in order to properly
position inventory and other resources
Forecasts are based on statistics which are almost never perfectly
accurate
Hence supply chain participants often carry an inventory buffer
stock
Moving up the supply chain from end-consumer to raw material
supplier, each supply chain participant has observed a variation in
demand and thus a greater safety stock
This demand variability alongwith time delays in transmitting
information upstream, delays in manufacturing & shipping together
cause bullwhip effect
It is estimated that the consequences of the bullwhip effect can
influence 30% of the profits for a manufacturing company

42

... Bullwhip Effect

Factors contributing to bullwhip effect

Forecast Errors

Each supply chain member adds a certain percentage to the

demand estimates

The result is no visibility of true customer demand

Batch Ordering

Periodic ordering (once a month, once a week, etc.)

Occurs when end retailer / distributor combines potential smaller

orders in an effort to
Reduce ordering costs
Take advantage of volume-pricing opportunities
Take advantage of transportation economics such as full

truck load economies

43

... Bullwhip Effect

... Factors contributing to bullwhip effect

Delayed information flow & material flow

Time delays in the transmission of information up the

supply chain

Time delays in manufacturing and shipping goods

Neglecting orders in an attempt to reduce inventory

Downstream supply chain members neglect orders to

reduce inventory & cut costs

44

... Bullwhip Effect

Minimizing / Neutralizing / Eliminating bullwhip effect

Minimize the cycle time in receiving projected and actual

demand information
Establish the monitoring of actual demand for product to as
near a real time basis as possible
Increase the frequency and quality of collaboration through
shared demand information
Eliminate incentives for supply chain partners that directly
cause order batching
Minimize promotions based on incentives that will cause
supply chain partners to delay orders and thereby interrupt
smoother ordering patterns
45

... Bullwhip Effect

... Minimizing / Neutralizing / Eliminating bullwhip effect

Offer products at consistently good prices to minimize

buying surges brought on by temporary promotional
discounts
Identify, and preferably, eliminate the cause of customer
order reductions or cancellations
Provide vendor-managed inventory [VMI] services by
planning inventory needs with the supply chain partner to
project end-user demand then, monitor actual demand to
fine tune the actual VMI levels
Adopt inventory control techniques such as Efficient
Consumer Response [ECR]
46

References
Presentation Image

http://www.china-assistance.com/how-it-works/supply-chain-management/
Introduction

Logistics Management -Sople Pg 36

Definition

Logistics Management -Sople Pg 36

http://theprofessornotes.com/wp-content/uploads/2010/09/Manufacturing-moving-towards-acollaborative-supply-chain_wiki.pdf
Origin / Evolution of SCM

Supply Chain Management - Altekar

Logistics & Supply Chain Management -Vinay Pandit Pg 30

http://www.elcnetwork.ca/ebusiness/efc_supply_chain_basics.pdf

http://en.wikipedia.org/wiki/Supply_chain
Supply Chain participants

Operations Management by R. Dan Reid & Nada R. Sanders 3rd Edition Wiley 2010
PowerPoint Presentation by R.B. Clough UNH M. E. Henrie - UAA [File name
ch04_scm_bull_whip.ppt]

Logistics & Supply Chain Management -Vinay Pandit Pg 31

Differences Logistics & SCM

Logistics Management - Sople Pg 39

Logistics & Supply Chain Management -Vinay Pandit Pg 32

47

References
Key SCM Concepts

http://finntrack.co.uk/images/chp_supchain.jpg
Relationship Management

Logistical Management -Bowersox Pg 93

Extended Enterprise

http://en.wikipedia.org/wiki/Extended_enterprise
Bullwhip Effect

http://www.mbaskool.com/business-articles/operations/104-bullwhip-effect.html

http://nl.wikipedia.org/wiki/Bullwhip_effect

http://en.wikipedia.org/wiki/Variance#Examples

http://maja.uni-mb.si/files/apem/APEM3-1_045-055.pdf

http://www.resourcesystemsconsulting.com/blog/archives/18

http://hosteddocs.ittoolbox.com/pa020609.pdf

http://pages.uindy.edu/~lgardner/bullwhip%20effect%20-%20IoPP.pdf

http://www.datalliance.com/donovan.pdf
Global scenario

http://www.wto.org/english/res_e/statis_e/its2010_e/its10_toc_e.htm

Elements of Logistics & SCM Vijay Kumar Bhatia Pg 100

Logistics & SCM Martin Christopher Pg 140

http://www.epiqtech.com/supply_chain-Global-Management.htm
Role of logistics in supply chain

Logistics Management -Sople Pg 177

Channel Structure

Logistics Management -Sople Pg 177

48