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Supply Chain Management is an essential aspect of business today. The idea is to apply a
total system approach to managing the entire flow of information, materials and services from
raw material suppliers through factories and warehouses to the end customers. An increasingly
popular perspective today is to view the flow of material from suppliers all the way to
customers as a system to be managed.
A supply chain is essentially a sequence of suppliers, transporters, manufacturing plants,
warehouses, wholesalers, retail outlets and finally the customers. Each participant in the supply
chain has a supply chain of his own that seamlessly integrates into the entire network. Till
recently these departments functioned independently. There were internal computerization of
these departments, but still they were island. Data sharing was not practiced. As demand
showed variations, the procurement of raw materials which was based upon customers’
demand was erratic. As distribution data was not available readily, it resulted in huge
inventories and equally huge instances of wastages. Some times when demand was
overestimated, huge quantities of consumables with short shelf life had to be destroyed.
These days we have the benefits of networking. SCTM (Supply Chain Transaction Management)
system is now internet based or intranet based. Data are accessible in real time. It cuts down
times and costs. If there is scarcity of raw materials, manufacturing gets immediate alert,
which in turn alerts packaging and distribution. Due to retailer-manufacturer linkage,
production and inventory planning have improved greatly. Points of sale information is captured
on-line. The number of days’ inventory to be maintained is then benchmarked. Production
schedules are designed accordingly and production then matches the distributors’ demand also.

Customer Analysis
Fulfillment Purchasing/Suppliers
Different companies may have different supply chains due the nature of their operations. The
Supplyfor manufacturing and service organizations
exhibits below illustrate typical supply chains
separately. A company can identify its supply Inventory
chain by first selecting a particular product group
Storage & Manageme
or product family. Then it should trace the flow of materials and information Management & final
from the
Transport nt Control
customer (end user) backwards through the distribution system, to the manufacturer and then
to the suppliers and the source of raw materials. This entire chain of activities and processes
constitute the supply chain for that product group or product family.
Demand & Lead Time
Supply Chain for a Manufacturing Organization
Material Management

Supplier Supply Chain for a Service Organization


Supplier Storage Mfg Storage Distributor



A large company willAnecessarily have several supply chains. In a multi-divisional company with
many product groups, there could be many different supply chains. For example, Procter and
Gamble may use any thing between 50-100 different supply chains to bring their products to
the customers inSupplier
the market. Importance
Storage of supply chain management can be gauged from
following reasons of B
its adaptation: -
(a) Total time for materials to travel through the entire supply chain can be quite long
(may be from 6 months to a year). Since the materials spend so much time waiting
in inventory, there is great opportunity to reduce the total supply chain cycle leading
to corresponding reduction inventory, increased flexibility, reduced costs and better
(b) Many companies have drastically improved their internal operations and now find it
necessary to consider relations with external customers and suppliers in the supply
chain to gain further improvement in their operations.
(c) Supply chain thinking is an application of systems thinking and provides a basis
for understanding processes that cut across a company’s internal departments and
processes that extend out the company as well.
It must be appreciated that a forecast becomes input to aggregate planning, which affects
inventory planning, which ultimately leads to scheduled of workforce and equipment. Any
decision taken at one stage affects the other stages also.



A basic purpose of supply-chain management is to control inventory by managing the flow of
a stock of materials INTEGRATED
materials. Inventory is FORECASTING used to satisfy customers demand or support the
production of good or services. In a manufacturing organization, there is an inward flow of
input materials, raw materials, component parts, bought out items, office supplies consumables
etc. to facilitate the manufacturing process, conversion or transformation process. The rate of
production depends on the demand for the finished goods. Another possible outflow is that of
scrap generated in the conversion process SCHEDULING
and defectives products produced and rejected.
Together, the rates of input and output flows determine the level of usable inventory (cushion
against stockout of input materials). Firms use TQM practices to reduce defectives and improve
production efficiency. The larger the scrap flow, larger will be the input flow of materials
required for a given level of output. Inventories may be held in the form of raw materials and
bought out components, work-in-process (WIP) and finished goods.
Managing the flow of material is common to organizations in every segment of the economy;
manufacturing, wholesalers, retailers, government departments, hospitals, education
institutions and the like. In a manufacturing firm, raw materials pass through several stages,
which transform them into various levels of WIP inventory. Final processing of this inventory
yields finished goods inventory, which may be held at the firm, the distribution centre,
warehouses owned by the manufacturer or wholesaler or at the retail locations. Typically the
manufacturer may spend up to 60-70% of the total sales revenue on purchased materials and
services. A typical service provider may spend up to 30-40% of total revenue on purchased
materials and services. Nowadays, companies are relying more than ever on suppliers from
around the world. Because materials comprise such a large component of sales revenue,
companies can reap large profits with a small percentage reduction in the cost of materials.
This is one reason why supply-chain management is becoming a key competitive weapon.

On area of operations and logistics playing a major role in supply chain management (SCM) is
that of materials management, which is concerned with decisions about purchasing materials
and services, inventories, production levels, staffing pattern, schedules and distribution, either
directly or indirectly.
Traditionally, organizations have divided the responsibility for materials management among
here different departments; purchasing, production control and distribution. This approach
requires a tremendous amount of coordination to achieve a competitive supply system, since
each department has their own administrative compulsions. Many firms in such cases resort to
centralized one department called materials management department although the name
logistics management is also used some times. This approach brings together all tasks
related to the flow of materials, from the purchase of raw materials to the distribution of
finished products or services.
Purchasing is usually responsible for working with suppliers to ensure the desired inward flow of
materials, including raw materials and components, and services. Production control is
responsible for determining production volumes and scheduling the machines and labour
directly responsible for conversion process. Distribution is normally responsible for the outflow
of materials from the firm to its customers. It may also be responsible for finished goods
inventories and selection of transport suppliers.

A supply chain consists of all the three stages involved, directly or indirectly, in fulfilling a
customer’s demand. It not only includes the manufacturer and supplier but transporters,
warehouses, retailers and customers themselves. With in the organization, the supply chain
includes functions such as new products development, marketing, operations, distribution,
finance and customer service.
A supply chain is dynamic and involves the constant flow of information, products and funds
between different stages. Each stage of the supply chain performs different processes and
interacts with other stages of the supply chain. Supply chain activities start with customer order
and end when a satisfied customer has paid for the purchase. It is not necessary that only one
player is involved at each stage of the supply chain. A manufacturer may receive supplies from
many suppliers and then supply finished goods to many distributors; therefore, most supply
chains are the supply networks or supply webs.
A typical supply chain may involve the following stages: -
(a) Customers
(b) Retailers
(c) Wholesalers/Distributors
(d) Manufacturers
(e) Component/raw materials suppliers.


Objectives of a supply chain should be: -
(a) To maximize the overall value generated. The value a supply chain
generates is the difference between what the final product is worth to the customers
and the efforts the supply chain expends in fulfilling customers’ requests.
(b) To achieve maximum supply chain profitability. Supply chain profitability is
the total profit to be shared across all supply chain stages.
(c) To reduce the supply chain costs to the minimum possible level.
Supply chain management involves the management of flows between and among stages in a
supply chain to maximize total profitability.


Four important activities involved in supply chain management are purchasing, logistics,
warehousing & distribution. These activities form the frame work for studying the nature
and scope of SCM.
Purchasing is responsible for obtaining the materials parts and supplies needed for production
or to provide a service. In manufacturing more than 60% of the cost of finished goods account
for purchased parts and raw materials. The importance of purchasing is not only just the cost of
goods purchased, but also the quality of good purchased and services provided and the timing
of deliveries of goods and services, both of which can have significant impact on operations.
Purchasing Interfaces – Purchasing is the link between the organization and the suppliers. It
exchanges information with the suppliers and functional areas. Diagram below shows the
interface of purchasing with other functional areas of the organization.

Operating Units constitute the main source of request for purchased materials and close
cooperation between these units and the purchasing
Legalis vital if quality, quantity and delivery
goals are to be met.
Legal department may provide assistance to the purchasing department in contact
negotiations, in drawing up bid specifications
Operatio for non-routine purchases and to help interpret
legislation on pricing, product liability and contract with the suppliers.
Accounting is responsible for handling payments to suppliers.
Data processing may be handled by the accounts department which keeps inventory records,
checks invoices and monitors vendor performances.
Design and Engineering usually prepare material specifications which must be communicated
to purchasing. Also design and purchasing people may work closely to determine whether
changes in specifications, design or materials can reduce theDesign
cost of purchased items.
Receiving checks incoming shipment of purchased items to determine whether the quality, the
quantity and the timings have been met and moves the goods to temporary storage.
Purchasing must be notified when shipments are delayed, accounting must be notified when
shipments are received so that timely payments can be made.
Suppliers and Vendors work closely with purchasing to learn what materials will be
purchased and what kind of specifications will be required in terms of quality, quantity and
deliveries. Purchasing must rate vendors on cost, reliability and so on. Good supplier relations
can pay dividends on rush orders and changes and vendors provide a good source of
information on product and material improvements.
The Purchasing Cycle – It starts with a request from within the organization to purchase
materials, equipment, supplies or other items from outside the organization and the cycle ends
when the purchasing is notified that a shipment has been received in satisfactory condition. The
main steps in purchasing cycle are:
(a) Purchasing receiving the requisition
(b) Purchasing selects the supplier
(c) Purchasing places the order with the vendor
(d) Monitoring orders
(e) Receiving orders

Logistics refers to the movement of materials with in a production facility, the shipment of
incoming materials from the suppliers and the shipment of outgoing finished products to
distributors/customers. Materials include all the physical items used in the production process
such as raw materials, parts, components, consumable supplies, fuel, equipment, tools, office
supplies and so on.
Movement with in the facility – The activities involved in the movement of materials with in
a production facility are: -
(a) Removing materials from incoming vehicles and placing them on receiving
(b) Moving materials from the receiving docks to inspections.
(c) Moving materials from inspections to the stores for safe keeping.
(d) Receiving materials from stores and delivering them to the production
operations when needed.
(e) Moving materials between different stages of production operations.
(f) Moving finished products from final assembly and storing them in finished
goods warehouse.
(g) Moving finished goods from finished goods warehouse to packaging and
shipment departments.
(h) Moving packaged finished goods to the shipment docks.
(i) Loading finished goods into outgoing vehicles at the shipping dock.
All above movements must be coordinated in such a manner that there is no queuing and
clogging at any place and timing what ever have been decided are maintained. Workers and
supervisors must take care that items are not lost, stolen or damaged during movement within
the facility or during transportation.
Evaluating Shipment Options – A situation that arises frequently in some businesses is
making a choice between quicker, but more expensive shipping alternative or cheaper but
slower alternative. In some instances, there is an overriding factor present that justifies
sending a shipment by the quickest means possible, so there is little or no choice involved.
However, in most of the cases where urgency is not involved, there can be many choices.
Decision in such cases often focuses on the cost savings of slower alternative versus the
increased holding cost that would result from it.
Innovations in Logistics – New developments are continually affecting logistics. Light weight
shipping containers, unitized loads, consolidated shipments, truck trailers on ships and many
other unique methods, fluctuating fuel costs are impacting the costs savings on logistics.
Computer networking facilities make updated information available at the tip of the finger.
Computer networking can be optimally utilized for movements within the facility as well for
outgoing shipments. It is very important for logistics department to keep track of latest
developments in the area of shipment and logistics management so that maximum savings can
accrue to the organization.

Warehousing is the management of materials while they are in storage. It includes storing,
dispersing, ordering and accounting for all materials and finished goods from the beginning to
the end of the production process. Warehousing operations deal with materials that directly
support operations and are the outcome of production process.
For keeping track of multiple varieties of items following techniques are used: -
(a) Bar Coding – Bar coding system facilitate in identifying and tracking the
items, boxes, consignments, shipments etc. It is also being used in their pricing,
quantities as also printing sales receipts and updating inventories. Bar coding is also
utilized in manufacturing and distribution. In distribution, companies can keep track
of items in warehouses and enroute to customers. Managers can instantaneously
determine the location of any item in the system and its status. In manufacturing,
bar codes track the progress of job just before each operation and specific
processing instructions for each job can be provided to operators.
(b) Electronic Data Exchange – It is the direct transmission of inter-
organization transactions, notices, debit or credit memos and the like. Benefits are: -
(i) Increased productivity
(ii) Elimination of paper work
(iii) Lead time and inventory reduction
(iv) Facilitation of JIT systems
(v) Electronic transfer of funds
(vi) Improved control of operations
(vii) Reduction in clerical work
(viii) Increased accuracy.
(c) Distribution Requirement Planning – It is a system for inventory
management and distribution planning. It extends the concept of MRP to multi-
echelon warehouse inventories, starting with demand at the end of the channel and
working that back through the warehouse system to obtain time-phased
replenishment schedule for moving inventories through warehouses network. DRP is
used to plan and coordinate transportation, warehousing, workers, equipment and
financial flows.


Companies follow different strategies for carrying out purchases. Some of the most practiced
strategies are: -
Multiple Suppliers – This strategy follows the belief that competition would drive down the
prices and reduce the risk of supplies being cut-off. This strategy plays one supplier against
another and –places the burden of meeting buyer’s demand on the supplier. Long term
partnering relationship is not the goal.
Few Suppliers – This implies that rather than looking for short term attributes such as low
cost, a buyer is better off developing a long term relationship with a few dedicated suppliers.
Using few suppliers can create the value by allowing suppliers to have the economies of scale
and a learning curve. Few suppliers, each with a large commitment to the buyer may also
become willing to participate in JIT system as well as provide innovation and technological
Vertical Integration – By this we mean developing ability to produce goods or services
previously purchased or actually buying a supplier or a distributor. Vertical integration may take
the form of forward or backward integration.
Backward integration suggests a firm purchases its suppliers – e.g. an automobile manufacturer
deciding to manufacture its own batteries and tyres.
Forward integration suggests that a manufacturer of component make the finished product –
e.g. a manufacturer of computer chips himself starts making computer hardware.
Keiretsu Network – This is a Japanese concept which is a trade-off between purchasing from
few suppliers and vertical integration. The manufacturers in this case often financially support
the suppliers through ownership or loans. The supplier becomes part of the company coalition
known as ‘Keiretsu’. Members of Keiretsu are assured of long term relationship and are
therefore expected to function as partners, providing technical expertise and stable quality
production material to the manufacturer.
Virtual Companies – The approach is to find flexible suppliers rather than letting vertical
integration lock an organization into business that it may not be suitable for. Virtual companies
are the companies that rely on a variety of supplier relationships to provide services on
demand. These are also called hollow corporations or network companies. Virtual
companies have fluid, moving organizational boundaries that allow them to create a unique
enterprise to meet changing market demand.
An example of virtual organization is an apparel or readymade garments business in which the
designers of clothes seldom manufacture, rather they licence the manufacture. The
manufacturer may then create the temporary infrastructure for production of designer clothes.


Materials constitute a large percentage of costs in manufacturing – up to 70%. Outsourcing

means procurement of materials, assemblies and other services from outside sources, rather
than doing them inside the company. Outsourcing enables a company to focus on its core
competencies – do what it excels in doing. It gives company a competitive edge.
The coordination of outsourcing is done by the materials management or production
management function. Any supply chain effort relies on certain process tools to evaluate
resources flows between suppliers and the operations management system. The most basic
supply management decision requires the operations mangers to choose whether to make a
given product internally or buy it from a supplier. Choosing product and services that can be
advantageously obtained from external source as opposed to manufacturing it internally is
known as make-or-buy decision. The role of purchasing department is to evaluate alternative
suppliers and provide current, accurate, complete data relevant to the buying alternatives.

Components that go into the production of many items are either made by the factory internally
or are purchased from outside suppliers. No automobile, watch, refrigerator, washing machine,
TV etc. is cent per cent work of one production unit, but has many parts which are purchased
from outside, made to order by some out production unit or simply bought off the shelf. The
considerations for taking a crucial make-or-buy decision are quite engaging.
Organization may decide to process the manufacturing of the material within its own factories
or have part or whole work done from some outside agencies. Make-or-buy decisions are policy
decisions and are arrived at after lot of deliberations at the top management level. The
purchase department having good knowledge of various issues involved takes an active part in
the deliberations by communicating information and data to the top management.


Generally four issues merit attention in all purchasing decisions; quality, quantity, cost and
service. These basic issues, as they affect the make-or-buy decisions are discussed below: -
Quality Considerations
(a) Compare the quality of the purchased item and the quality that the company
could have achieved, had it made it on its own. If there is no possibility of a very
wide variation, quality considerations are comparatively less significant in making a
make-or-buy decision.
(b) If there is a possibility of wide variation between the two alternatives, quality
factor becomes crucial. If better quality can result when the company produces the
item on its own and therefore takes to making it rather than buying, it should probe
the matter further.
(c) Absence of quality desired for in the market may indicate the situation where
suppliers have not thought it worthwhile to make it considering the small, non-
recurring demand for it. So economic viability of producing the desired item should
be considered by the manufacturer in the light of this situation.
(d) If the specifications of the engineering department regarding quality are more
fastidious than necessary for proper operations, or expected life for commercial
standards, there may be room for relaxing specifications a little bit so that the
purchase of item from outside becomes feasible. Expert advice in this case is a must.
(e) A component of a new product may be in short supply initially; but the
situation is temporary. Make-or-buy decision must be taken in light of this scenario,
or else heavy commitment may result in making the component in house which in
long run may prove to be cost-intensive.
(f) Production unit’s own production facilities should be taken in account while
taking decision. Are we technically competent to produce a better quality or the
specialist supplier can provide a better quality? Or the product has to be necessarily
produced in house because no specialist supplier can produce the desired quality.
(g) Another aspect which is very significant is getting over the legitimate
apprehension that an outsider having no stakes in the finished product may make
comprise in quality standards. For an outsider supplier, it thus becomes necessary to
have rigid quality control standards and a procedure to eliminate non-standard
(h) Unpatented designs or processes are generally not entrusted with outsiders to
protect business interests by preventing others copying them
(i) Buying from outside supplier has several reasons:
(i) To take advantage of specialist activities of the supplier.
(ii) To take advantage of quality resulting from patents or production methods that
the supplier controls
(iii) To introduce flexibility with respect to quality of the part being purchased.
Quantity Considerations
(a) Quality and quantity considerations differ with reference to one
important issue – Quality is fairly specifiable, whereas quantity can not be. Quantity
is always in a state of flux and it is related with time element. The correct quantity
under specified conditions at a given time may not be valid at another time under
changed circumstances. How much to buy – quantity is variable whereas what to buy
– in not.
(b) Considering on the basis of quantity, the make decision is taken
when the supplies are likely to be too small to be of any interest to the outsider. In
such a scenario, large enough quantity could be considered to interest the supplier.
However, it must also be seen that a comparatively large quantity is economically
viable to maintain in the inventory or not.
(c) It may be worthwhile to consider the economics of making a small
use item in house when the outsider does not find it profitable to provide. Another
decision in this regard would require close coordination between quantity actually
required and quantity which can be economically produced. PPC can be used for this
(d) It may happen that the quantity is very large necessitating it
splitting between several suppliers. However, when the item is made with the help of
dies or patterns, this option can not be used. In case when splitting is feasible, it
may be profitable to even relax specifications a little bit and buy it from several
Cost Considerations
(a) Cost has relevance in make-or-buy decision when all other factors do not
provide clear cut option. The decision in this case rests on comparison between a
known cost and an estimated cost. The known cost is the price charged by the
vendor and the unknown cost is the estimated cost of making it in house. If there is
a negligible difference between known cost and unknown cost, it is always better to
buy in from outside as it may be more reliable than a slightly lower unknown cost.
(b) Operating capacity of the plant also playas a significant role. If plant is
running full capacity and making the component in house needs expansion of plant
or additional infrastructural improvements which may increase the cost of production
substantially, it will be better to buy it from outside.
(c) Even if the plant is running below capacity and the projected sales will require
full capacity production in a few years, it will be economical to buy it from outside.
(d) Transportation cost and all allied costs must also be taken into consideration
while arriving at the decision of purchasing from outside.
Service Considerations
(a) Guarantee of supply is the main service consideration. Generally when a
company makes it in house, the supply is more assured as compared to buying.
Assured supply to assembly line is the often a reason for making rather than buying.
Such decisions are valid for large industrial concerns where uninterrupted supply is
necessary to prevent breakdown in supply line.
(b) Making rather than buying may enable a firm to give more assured and
regular employment to employees.
(c) Unfair practices of the suppliers may force a company to resort to making
rather than buying. The existence of monopolistic condition provides a strong
stimulus to make rather than buy. Some times a company is compelled to devise a
substitute for a patented item so as to protect against a ‘legal monopoly’.
(d) A company may stop purchasing one item and start making it. The suppliers
of other items or components may develop apprehensions that even other items will
also finally be made by the company. Suppliers not being assured of the business
may compromise on quality.
(e) Once a company starts making one item it self, it may lose the flexibility of
negotiating with multiple suppliers. Because suppliers may not be assured of regular
demand of the item and may not compromise on cost factor.
Other Considerations
(a) While deciding to make an item, attention should be paid to the availability of
technical know-how. Even if technical know-how is available, its cost must be
(b) Taxation policy of the government should be considered while deciding to
make the item.
(c) In general a new company that is still growing will tend to buy more items
than a company that has reached maturity.
(d) With desire to make the company growth oriented, the management may
decide to make items it formerly bought. Industrial relations are reflected in make or
buy decisions. Trade unions often attempt to include in their contract clauses that
prohibit management from buying or sub-contracting items that can be
manufactured in its own plant.

(a) Sub-contracting involves hiring another firm to perform some of the
manufacturing processes or to give sub-assemblies that will be incorporated into the
end product. Sub-contracting, in other words, is one method of buying instead of
making and hence many of the factors discussed earlier influence the sub-
contracting decisions as well.
(b) Subcontracting has several advantages. It is the fastest method of increasing
output. The buyer uses manpower where it is located instead of shifting that
manpower into his own plant. It enables him to use technical and management skills,
already existing as a functioning unit instead of developing new units. It may avoid
the need for new plants and equipment on the part of the buyer, since he in effect,
borrows existing facilities.
(c) Subcontracting checks over-expansion of production facilities. Such over-
expansion can create serious over capacity if the demand is temporary.
(d) Subcontracting will generally save the buyer from incurring investment costs
in specialized machinery and tooling which may not be usable for his regular
production requirements. However, since subcontractor does not incur such costs,
his operating costs still reflect them and to some extent his savings may be more
nominal than real. It is called comparative cost factor to be considered prior to
making the subcontracting decision.
(e) There is a factor of relative cost between doing one job in the plant and
subcontracting for it. It is important to raise certain questions and to answer them in
the light of particular situation and sound business principles. To what extent the
subcontractor permits his facilities to be committed to the buyer? To what extent
should a buyer assist a subcontractor in procuring materials, supplies and tools? To
what extent should technical assistance be extended? To what extent a
subcontractor is financed?
(a) In the 1990s, outsourcing emerged as a major make-or-buy option. When
organizations buy from outside what they were formerly making in house, is called
outsourcing. Outsourcing is reversal of a previous make decision.
(b) Some activities have been traditionally outsourced, e.g. janitorial, food,
security etc. More and more activities are being outsourced to downsize or right size,
to emphasize on value added activities and to focus on core competencies. Such
outsourcing leads to savings, survival and prosperity.
(c) Now-a-days transport companies have added logistics aspect to their
function. They just do not move goods from one point to another. They manage all
dispatches over a period of time. They have tracking technologies to reduce risks. In
JIT system, such logistics support is crucial.


Supply chains have inherent system dynamics. Three key points about supply chain dynamics
are: -
(a) The supply chain is highly interactive system – Decision in one part of
supply chain affects the other parts.
(b) There is an accelerator effect of demand change – Upstream elements
(warehouses and the factory) must be careful not to over-react to inflated orders
from downstream elements rather than real demand change at the end user level.
Even with perfect information at all levels there will be accelerator effect in the
supply chain due to replenishment lead time.
(c) The best way to improve the supply chain is to reduce the total
replenishment time and to feed back actual demand information to all
levels. The time lags in the supply chain only serve to create fluctuations in orders
and inventories. Forecasting of demand changes can also serve to dampen the effect
of actual change and demand management can smoothen changes in the demand
The best way to achieve the changes needed for effective supply chain management is to
increase coordination within and between various organizations involved.