AN INTRODUCTION TO SUPPLY CHAIN

A supply chain is a network of facilities and distribution options that performs the functions
of procurement of materials, transformation of these materials into intermediate and finished
products, and the distribution of these finished products to customers. Supply chains exist in
both service and manufacturing organizations, although the complexity of the chain may
vary greatly from industry to industry and firm to firm.

Below is an example of a very simple supply chain for a single product, where raw
material is procured from vendors, transformed into finished goods in a single step, and
then transported to distribution centers, and ultimately, customers. Realistic supply chains
have multiple end products with shared components, facilities and capacities. The flow of
materials is not always along an arborescent network, various modes of transportation may
be considered, and the bill of materials for the end items may be both deep and large.

Traditionally, marketing, distribution, planning, manufacturing, and the purchasing

organizations along the supply chain operated independently. These organizations have
their own objectives and these are often conflicting. Marketing's objective of high customer
service and maximum sales conflict with manufacturing and distribution goals. Many
manufacturing operations are designed to maximize throughput and lower costs with little
consideration for the impact on inventory levels and distribution capabilities. Purchasing
contracts are often negotiated with very little information beyond historical buying patterns.
The result of these factors is that there is not a single, integrated plan for the organization---
there were as many plans as businesses. Clearly, there is a need for a mechanism through
which these different functions can be integrated together. Supply chain management is a
strategy through which such integration can be achieved.

Supply chain management is typically viewed to lie between fully vertically integrated
firms, where the entire material flow is owned by a single firm, and those where each
channel member operates independently. Therefore coordination between the various
players in the chain is key in its effective management. Supply chain management is a well-
balanced and well-practiced relay team. Such a team is more competitive when each player
knows how to be positioned for the hand-off. The relationships are the strongest between
players who directly pass the baton, but the entire team needs to make a coordinated effort
to win the race.

SUPPLY CHAIN MANAGEMENT

An Evolving Concept
Supply Chain Management (SCM) has emerged as one of the principal areas on
which leading edge companies are focusing to increase market share, profitability,
competitive advantage and shareholder value. While the term "Supply Chain Management"
is widely used, there is not general agreement as to the definition and scope of the SCM
concept. In fact, during the last several decades, the term itself has evolved from
"Distribution" to "Logistics" to "Supply Chain Management."

WHAT IS SUPPLY CHAIN?

Definitions from well-respected references have varied during the past decade. For
example, Supply Chain Yearbook 2000 described SCM as, " A chain of processes that
facilitates business activities between trading partners, from the purchase of raw
goods and materials for manufacturing to delivery of a finished product to an end
user."

APICS-The Performance Advantage, offered this definition in January 1999: "The

global network used to deliver products and services from raw materials to end
customers through an engineered flow of information, physical distribution and cash."

This is a little change from the 1997 definition, Logistics Management offered, describing
SCM as, "The delivery of enhanced customer and economic value through
synchronized management of the flow of physical goods and associated information
from sourcing to consumption."

The definition evolution continues as European Logistics Association, in 1995

suggested SCM was, "The organization, planning, control and execution of the goods
flow from development and purchasing through production and distribution to the final
customer in order to satisfy the requirements of the market at minimum cost and
minimum capital use.

SUPPLY CHAIN OBJECTIVE

The objective of the supply chain is to support the flow of goods and materials from
the original supplier through multiple production and logistics operations to the ultimate
consumer. Supply chain management is the planning and control of this flow to speed time
to market, reduce inventory levels, lower overall costs, and, ultimately, enhance customer
service and satisfaction

The time has come when companies can no longer afford to look at their operations
in a vacuum. What they now need is the ability to collect comprehensive, accurate, and
timely information over the entire supply chain. By analyzing this information, they can
better understand how changing conditions affect their businesses. Making informed
business decisions this way helps organizations accomplish their business goals while also
helping them use information for competitive advantage.

DESIGNING THE SUPPLY CHAIN

Essentially a company wants a supply chain that not only meets customer’s needs
but also provide an edge against competitor. This requires an organized approach to
designing a supply chain. There is a sequence of four decisions.
 Delineate the Role of Distribution with In the
Market
A channel strategy should be designed with in the context o an entire marketing mix.
First the firm’s marketing objectives are viewed. Next the role assigned to product, price,
and promotion are delineated. Each element may have a distinct role or two may share
assignment. A company must decide whether distribution will be used defensively or
intensively. If defensive, a firm will strive distribution as good as. With an offensive strategy,
a firm uses distribution to gain an advantage over competitors.

Selecting the Type of Channel

Once the distribution’s role in the overall marketing programme has been agreed on,
the most suitable channel for the company’s product is determined. Firms may rely on
existing channel or may use new channel to better serve existing customers, reaching new
customers, and gain an edge on competitors. A firm needs to decide whether middle man
used in the channel and if so which type of middleman.

Choosing Specific Channel Members

The last decision is the selection of specific firms or “brands” of middleman to
distribute the product. For each type of institution, there are numerous specific companies
from which to choose.

When selecting specific firms to be part of a channel, producer must assess factors
related to market, product, and company as well as middleman. Another key factor is
intensity necessary to serve its target market well. Two additional factors are whether the
middleman sells the market that the manufacturer wants to reach and its product mix,
pricing strategies, promotion and customer service are all compatible with the producer’s
needs.

THE BASIC LINKS OF SCM

 For most of the last century, the supply chain__ a company links to manufacturers
suppliers, distributors, and customer__ was an inflexible series of events that somehow
managed to get products out the door. A paper-heavy adventure, it often involved
questionable inventory forecasts, ironclad manufacturing plans and hypothetical shipping
schedules.

The Internet changed all that. It has transformed this archaic in to some thing closer
to an exact science when we think of the internet enabled supply chain__ wit its just-in-time
delivery, precise the inventory visibility and to-the-minute distribution-tracking capabilities__
as strategic weapon that can:

 Help companies to avoid costly disasters

 Reap cost cutting and revenue producing benefits

 Slice the cost of holding too much or struggling with too little inventory

That potential so central to the operations of business that while automating a supply
chain requires careful planning and must start with an excellent understanding of
relationship with partner and customer.

When evaluating SCM initiatives it will pay to keep the following basics in mind.

Visibility
 All the players in the supply chain should be able to react to the order.

All the players in the chain simultaneously manage inventory, control manufacturing
schedules and deliver an order on time to a customer.

Architecture
 Supply chain application must link to existing enterprise resource planning
application.
 Ideally, there should be single point of visibility for inventory and order taking.
Customer could place and track order with the web interface and customer service
representative would have access to same information customer see. A database would
store and manage orders, and customer would be able to check inventory and order
status in real time any time.

Rethink the Chain

 The customer replaces the product line as the center of supply chain’s
universe.

As today, customer order touches multiple product lines and multiple channels of
distribution. The focus has to be on filling, delivering, and managing inventory for every
order that a customer places. Every order should penetrate to the same system that
manages inventory and connects to the suppliers and distributors.

Total Involvement
 Customers and others links in the chain have to be ready to handle web-
based technology.

When rolling out s project, company must decide which customer and supplier use it
first. That decision can be based on several factors.

Consider the salesman’s “80/20” rule: 20 percent customers place 80 percent of

orders, so companies should consider offering web capability to that 20 percent
customer first.

Simplicity is the key: application that are easy to use and connect to will be most
popular with the members of supply chain. Extensible markup language used in
application can provide a lingua franca for all the members of the chain

SUPPLY CHAIN DECISIONS

 We classify the decisions for supply chain management into two broad categories --
strategic and operational. As the term implies, strategic decisions are made typically over a
longer time horizon. These are closely linked to the corporate strategy (they sometimes {is\
are} the corporate strategy), and guide supply chain policies from a design perspective. On
the other hand, operational decisions are short term, and focus on activities over a day-to-
day basis. The effort in these type of decisions is to effectively and efficiently manage the
product flow in the "strategically" planned supply chain.

There are four major decision areas in supply chain management: 1) location, 2)
production, 3) inventory, and 4) transportation (distribution), and there are both strategic
and operational elements in each of these decision areas.

Location Decisions
The geographic placement of production facilities, stocking points, and sourcing
points is the natural first step in creating a supply chain. The location of facilities involves a
commitment of resources to a long-term plan. Once the size, number, and location of these
are determined, so are the possible paths by which the product flows through to the final
customer. These decisions are of great significance to a firm since they represent the basic
strategy for accessing customer markets, and will have a considerable impact on revenue,
cost, and level of service. These decisions should be determined by an optimization routine
that considers production costs, taxes, duties and duty drawback, tariffs, local content,
distribution costs, production limitations, etc. Although location decisions are primarily
strategic, they also have implications on an operational level.

Production Decisions
The strategic decisions include what products to produce, and which plants to
produce them in, allocation of suppliers to plants, plants to DC's, and DC's to customer
markets. As before, these decisions have a big impact on the revenues, costs and customer
service levels of the firm. These decisions assume the existence of the facilities, but
determine the exact path(s) through which a product flows to and from these facilities.
Another critical issue is the capacity of the manufacturing facilities--and this largely depends
the degree of vertical integration within the firm. Operational decisions focus on detailed
production scheduling. These decisions include the construction of the master production
schedules, scheduling production on machines, and equipment maintenance. Other
considerations include workload balancing, and quality control measures at a production
facility.

Inventory Decisions
These refer to means by which inventories are managed. Inventories exist at every
stage of the supply chain as either raw materials, semi-finished or finished goods. They can
also be in-process between locations. Their primary purpose to buffer against any
uncertainty that might exist in the supply chain. Since holding of inventories can cost
anywhere between 20 to 40 percent of their value, their efficient management is critical in
supply chain operations. It is strategic in the sense that top management sets goals.
However, most researchers have approached the management of inventory from an
operational perspective. These include deployment strategies (push versus pull), control
policies --- the determination of the optimal levels of order quantities and reorder points, and
setting safety stock levels, at each stocking location. These levels are critical, since they are
primary determinants of customer service levels.

Transportation Decisions
The mode choice aspect of these decisions are the more strategic ones. These are
closely linked to the inventory decisions, since the best choice of mode is often found by
trading-off the cost of using the particular mode of transport with the indirect cost of
inventory associated with that mode. While air shipments may be fast, reliable, and warrant
lesser safety stocks, they are expensive. Meanwhile shipping by sea or rail may be much
cheaper, but they necessitate holding relatively large amounts of inventory to buffer against
the inherent uncertainty associated with them. Therefore customer service levels, and
geographic location play vital roles in such decisions. Since transportation is more than 30
percent of the logistics costs, operating efficiently makes good economic sense. Shipment
sizes (consolidated bulk shipments versus Lot-for-Lot), routing and scheduling of equipment
are key in effective management of the firm's transport strategy.
 SUPPLY CHAIN MODELING APPROACHES
Clearly, each of e two levels of decisions require a different perspective. The
strategic decisions are, for the most part, global or "all encompassing" in that they try to
integrate various aspects of the supply chain. Consequently, the models that describe these
decisions are huge, and require a considerable amount of data. Often due to the enormity of
data requirements, and the broad scope of decisions, these models provide approximate
solutions to the decisions they describe. The operational decisions, meanwhile, address the
day to day operation of the supply chain. Therefore the models that describe them are often
very specific in nature. Due to their narrow perspective, these models often consider great
detail and provide very good, if not optimal, solutions to the operational decisions.

we divide the modeling approaches into three areas --- Network Design, ``Rough
Cut" methods, and simulation based methods. The network design methods, for the most
part, provide normative models for the more strategic decisions. These models typically
cover the four major decision areas 1) location, 2) production, 3) inventory, and 4)
transportation (distribution), and focus more on the design aspect of the supply chain..
These models typically assume a "single site" (i.e., ignore the network) and add supply
chain characteristics to it, such as explicitly considering the site's relation to the others in the
network.

Network Design Methods

As the very name suggests, these methods determine the location of production,
stocking, and sourcing facilities, and paths the product(s) take through them. Such methods
tend to be large scale, and used generally at the inception of the supply chain. The earliest
work in this area, although the term "supply chain" was not in vogue, was by Geoffrion and
Graves [1974]. They introduce a multicommodity logistics network design model for
optimizing annualized finished product flows from plants to the DC's to the final customers.

Clearly, these network-design based methods add value to the firm in that they lay
down the manufacturing and distribution strategies far into the future. It is imperative that
firms at one time or another make such integrated decisions, encompassing production,
location, inventory, and transportation, and such models are therefore indispensable.

Rough Cut Methods

These models typically deal with the more operational or tactical decisions. Most of
the integrative research (from a supply chain context) in the literature seems to take on an
inventory management perspective. In fact, the term "Supply Chain" first appears in the
literature as an inventory management approach. The thrust of the rough cut models is the
development of inventory control policies, considering several levels or echelons together.
These models have come to be known as "multi-level" or "multi-echelon" inventory control
models.

Simulation Methods
Simulation method is a method by which a comprehensive supply chain model can
be analyzed, considering both strategic and operational elements. However, as with all
simulation models, one can only evaluate the effectiveness of a pre-specified policy rather
than develop new ones. It is the traditional question of "What If?" versus "What's Best?".

SUPPLY CHAIN RE-ENGINEERING

Successful supply chain reengineering requires an understanding of various disciplines, such

as information technology and business process improvement, together with the ability to
mobilize and motivate diverse corporate cultures. Reengineering is fraught with risk, but by
keeping some principles in mind, success is more likely. In addition, the rewards are
potentially enormous.

CONCEPTS AND IMPLEMENTATION

Anyone who has become familiar with the concepts of Supply Chain Management realizes
that (for most organizations) it means significant change to current business processes, job
definitions, organizational structure, business policies and culture in essence - creating a
new business model. And even if the current information technology (IT) applications
support today's business model, it is highly unlikely that these IT applications will effectively
support supply chain business model. The resulting acquisition and implementation of new
information technology will become the most costly and time-consuming component of
implementation.

There are some critical success factors particular to supply chain reengineering, such as
information technology, scope (breadth and focus), mobilizing within multiple cultures, and
building and sustaining momentum.

First we have to decide which comes first the reengineering or the IT acquisition,
especially if the objective is to enable superior business operations and management.
Reengineering creates a new business model, for which the business requirements are
documented and mapped to various technology solutions. The solution with the best fit is
selected, and the overall implementation begins.

But in many cases, we find that the organization has already acquired IT solution,
and is now considering how to reengineer the current business model for supply chain
management.

The solutions range from ignoring the reengineering and just installing IT application
to resetting the "go-live" date. But delay in "go-live" will be offset by the earlier achievement
of higher levels of benefits. The (relative) simplicity of the pure technology implementation
keeps beckoning, and the goal of implementing a superior new business model is easily
forgotten.

Do We Change It All at Once?

The scope of supply chain management is huge; some definitions start with the integration of
customer fulfillment needs through the optimization of product production and delivery, and
incorporating supply management. Very few of those who have ventured down this path have
succeeded, although many have declared victory. The problems are that it is just too big, the
breadth of change and resistance frequently overcomes any project team (see Figure).
 How to Change

The solution is to partition and prioritize. Think big, but implement in small steps.
Achieve early victories to sustain momentum. Use early delivery of benefits to help fund
additional costs. Even this is still a challenge, because the company will have to live with
some business units working in business model while others are still in the old. The
incongruities are troublesome at times, but still offer less risk than doing it all at once.

What To Reengineer?
As the company looks for ways to partition and prioritize, the tendency is to approach
it from an organizational perspective. Because most companies operate, manage and
reward from an organizational perspective, it feels natural to develop a plan sequencing the
reengineering of various organizations (e.g. customer service, logistics, purchasing). It is
easy to identify the responsible managers, as well as point the finger at the change targets.

Most business processes have many hand-offs, associated manual control systems,
many non-value steps, huge cycle times and high levels of cost. In a nutshell, it is the
process that is not managed. So when the reengineering efforts focus on organizational
activities, they fail to address the opportunities for improving the performance of the overall
business process. This may result in higher organizational performance, but may be of little
benefit to the customer and the company.

The solution is construct a business model of the company's key business

processes. Describe the processes in verbs and nouns (so that no one will confuse them
with organizations). For clarity, any process that is depicted must be described by the 5 to 9
sub-processes that it comprises. Use a structured analysis concept of having multiple levels
of processes. If the top level is the enterprise/company, then the second level is the 5 to 9
major business processes that the enterprise does, and for each of those processes,
describe the 5 to 9 processes that comprise it. Now we have identified 25 to 81 key
business processes, and they can be mapped to business strategies to determine which
business processes need superior or improved performance. The outline of a plan, based
on reengineering business processes, begins to emerge and it has focused on identifying
and prioritizing business processes for reengineering (see Figure).
 Supply Chain Business Model

Mobilizing Multiple Cultures

Typically, supply chain management reengineering involves external customers
and/or suppliers. If it doesn't, it is just an internal project masquerading as supply chain
reengineering.

A huge challenge exists the integration of the customers and suppliers into the
reengineering project. Issues include:

 Working with different engrained cultures based on past relationships

 Establishing trust in how benefits will be realized
 Coordinating resources across multiple companies
 Determining project leaders and resources
 Sharing funding
 Fearing loss of competitive information

The goal is to get the right people together to address these issues early and
develop a strong project charter so that the project team can be effective. Failure may doom
from the beginning, and this failure won't be discovered until considerable time and money
have been wasted.

There are no easy answers here, but there is an approach that works. We can take the
business model (from above), and identify the external and internal customers and suppliers
for the business processes being reengineered. Within those segments, we can identify
those who are most important to us both today and in the future. Using the desired project
outcomes, we can usually get a coordinated meeting of the external representatives
(probably one company at a time). Here is where many lose the opportunity usually by
having a fairly fixed desired outcome and even to the point of having identified some
potential changes. The difficulty is that all the ownership is on one side, and there is
frequently neither partnership nor agreement. Further progress is seriously impaired.
 But if the agenda is approached without preconception, and with a clear goal, then
we have a pretty good first cut at a team-based project charter. The details can be worked
out, and the partnership created to get off to the right start. The key point is to develop a
charter that all key stakeholders have ownership of, and provide clarification as to what is
being addressed, for what objectives, in what way, with what resources, and to what
schedule. Consider the charter to be a contract between management and the project team,
and remember a weak, vague contract inevitably results in a weak or failed project.

Building Momentum
A critical success factor will become creating and sustaining momentum for the
project. It will be months before it is complete, and many of the participants still have their
normal job to do. The easiest and fastest place to start is the "as-is" assessment. The
techniques are easy to use; the data relatively fast to acquire; and within two months we
should have a pretty good picture of how the process works today and what its performance
measures are. It's likely that most of the process measures did not exist and the data for
them probably had to be created.

What should emerge through the walk-throughs of what was documented is the
identification of fast track opportunities small changes that can be quickly implemented with
little or no cost. These opportunities may or may not have significant tangible benefits; they
represent the beginning of real change. They demonstrate that change will happen and
begins to differentiate this project from others that produced no results. Project momentum
builds. Additionally, the ease in which the fast tracks are implemented provides significant
insight as to the barriers that can be expected during the implementation of major change
(see Figure 4).

Sustaining Momentum

Sustaining Momentum

We have reached the point where we generate the major redesign ideas. There are many
techniques here they generally revolve around structured workshops with team members
and employees from the process areas. A key tactic is to increase the number of people
involved, by having many participate in workshops of short duration (8-24 hours). By having
more people involved, we ultimately have more people committed to its implementation. At
this stage treat all ideas as good ideas (most are), with the emphasis on getting hundreds of
ideas out on the table. Some of the workshops can create different external scenarios such
as globalization, economic downturn and new competition so that the team can be building
change idea scenarios for economic conditions different from today. Special techniques
need to be used to get the participants to think outside of the current process and job.

When the workshops are over, the team returns to assessing each idea, adopting
the good ones, and then creating a conceptual view of how process works, and
subsequently defining jobs, organization, management systems, business polices and
technology requirements.

INTEGRATING THE SUPPLY CHAIN

Information Integration
The concept of integrating information lies at the heart of most organizations' efforts
to improve business processes. Modern ERP systems are designed to accomplish this and
to provide organizations with a system for planning, controlling, and monitoring an
organization's business processes. ERP systems achieve high levels of integration by using
a standard mechanism for communications, developing a common understanding of what
the shared data represents, and establishing a set of rules for accessing data.

Dealing With Complexity Beyond The

Enterprise
Similar to ERP solutions, supply chain solutions also must integrate information
consistently. Unlike ERP systems, supply chain systems must cope with the complexity of
integrating information from any number of disparate information systems anywhere along
the supply chain. If you look at the methods an ERP system uses to integrate operations,
you will find some that are applicable to supply chains and others that are not.
 For example, ERP systems within a single company use a database as the basis of
communications within the organization; individual applications access data via any of a
number of standard networking protocols.

In addition to a standard means of communications, businesses must agree on what

the shared data represents and on rules governing its access, including authorization
procedures. The only way to reach this common ground is by adopting a common set of
standards.

Enabling Integrated Decision Making

SAP will continue to champion open standards in an effort to integrate business
processes across the supply chain. In the process, SAP will deliver the highest levels of
data integration available in supply chain software that, in turn, will enable integrated
decision making.

Integrated Decision
The demand for high-performance supply chain solutions to manage and integrate
data from a wide variety of systems is just the beginning. These solutions also must
combine powerful decision-making capabilities with the ability to enact change within an
organization's business processes. Just as ERP systems integrate data within the
organization, supply chain solutions must integrate decisions within the extended
enterprise.

Real-Time Decision Support

The need for real-time decision support is complicated by the fact that this support
cannot be applied to just one or a few links in the supply chain. High-performance supply
chain solutions must monitor all the elements of the chain, making critical decisions and
continuously affecting process change.

For years, companies have employed powerful computers to analyze business

process data and provide decision support. This analysis occurred on an as-needed basis
and changes were frequently enacted with little understanding of the effect on other
functional areas of the business.

Something as simple as a company's decision to launch a marketing campaign can

produce a flurry of orders for a product and a series of disruptions across the entire product
supply chain. These disruptions may begin with procurement's inability to secure parts and
end with customer dissatisfaction with delivery.

The Complete Supply chain Picture

The second step is to combine the core transaction system along with all of its
business intelligence with real-time information handling and decision making. This added
functionality will help you combine business data with information from the extended
enterprise to paint a more timely and accurate picture of the entire supply chain. Only then
can you make informed decisions that will cut the time to market, reduce inventory, lower
costs, and improve customer satisfaction.

Executive Excellence with the Enterprise

Execution excellence is the capability of an organization to implement and execute
its business processes in such a way as to maximize business benefits.

The business applications driving this effort must be capable of processing extremely
high volumes of information. They must be open, robust, highly flexible, easily configured
and managed, and they must ensure a high level of data integrity throughout the
organization.

SAP R/3 System

The SAP™ R/3™ System, SAP's enterprise resource planning (ERP) software, is
the world's most popular standard business software for client/server computing. R/3
delivers total solutions that span the organization, incorporating business functions such as
sales and materials planning, production planning, warehouse management, financial
accounting, and personnel management into an integrated workflow of business SAP is
committed to delivering solutions that automate critical supply chain processes in ways that
improve performance and provide a distinct competitive edge.

SAP is committed to delivering solutions that automate critical supply chain

processes in ways that improve performance and provide a distinct competitive edge. SAP
solutions deliver robust functionality, a high degree of configurability, and real-time data
integration so you can leverage the power of information to your fullest advantage.

R/3 in the Supply Chain Today

Achieving execution excellence and extending the enterprise were natural
milestones in the R/3 System's movement toward a total integrated supply chain solution.
Further, R/3 Release 3.1 leverages the optimized business data in the Business Information
Warehouse along with powerful messaging capabilities to provide the real-time decision
support required to perform effective supply chain management. Today, powerful third-party
programs using memory-resident analytical engines have taken advantage of R/3
messaging and extended its capabilities to include supply chain functionality. These tools —
which range from supply planning, plant scheduling, and demand planning to logistics —
communicate directly with R/3 and help you make timely decisions to optimize supply chain
performance.

R/3 in the Supply Chain Tomarrow

 SAP continues to focus its development efforts on more robust supply chain
functionality in R/3. Just as SAP has responded to customers' requests for increased
functionality and performance from their R/3 systems, SAP will work to deliver the supply
chain management and optimization solutions its customers are seeking.

In the coming months, you will see comprehensive supply chain functionality built
into new R/3 releases and made available as add-ons to existing R/3 versions. These
solutions will feature powerful new computing techniques and will represent a dramatic
improvement over supply chain solutions currently available in the market today.

SCM FOR SMALL DISTRIBUTORS

 Supply chain management is really about relationship management - and
that applies to distributors of all sizes.

Industrial distribution is a relationship business. That’s a common statement, but

one that couldn’t be more true when it comes to the concept of “supply chain management.”

As distributors of all sizes look to take costs out of the channel, experts should begin
by taking a good, hard look at their business relationships. Are they buying the right
products from the right suppliers? In turn, are they managing their prices, costs and margins
effectively? Are they selling to the right customers? Are they using information from both
suppliers and customers to manage and control inventory levels?

In its most basic form, supply chain management is all about taking costs out of the
channel. And that’s something distributors of all sizes can get involved in.

Supply Chain Management can be broken down into four primary tenets: inventory
management, supplier management, customer management, and financial management.

Inventory Management
One of the first steps to taking costs out of the channel — for any size distributor —
is getting a handle on inventory costs. And that’s where technology can help. Inventory
management software systems can help distributors track demand history and forecast
future demand on an item-by-item basis. This will help optimize inventory levels, reduce
stock-outs and identify slow movers.

Keeping inventories as low as possible — while also maintaining an acceptable “in stock”
level — can help reduce the amount of working capital tied up in inventory and free up cash
for more strategic use.

Warehouse management systems are also effective. Even the most basic
warehouse management software packages can give distributors the information they need
to slim down inventory levels and identify slow-moving and obsolete stock.

Bar coding systems can also help distributors better manage inventory and run their
warehouses more profitably. Such technologies are more affordable than some small
distributors may realize.

“The expansion of technology and the increase of competitive providers have combined to
push costs down and the interest of selling to ‘small’ distributors up across the industry,”

Supplier Management
Inventory and warehouse management programs can help with supplier
management, but distributors can take other steps in that direction, as well. Distributors
should use activity based costing techniques to “quantify the total cost of doing business
with each of their suppliers and with their supply base on the whole.” Distributors can do
that by tracking costs by product line and supplier to identify where they are making and
losing money. That information should be used to “fire” the worst suppliers and re-negotiate
prices with good, but unprofitable suppliers, he says.

To achieve customer goals, the distributor must first control his own costs. Suppliers
can help in that objective by providing the distributor with “solutions” — which could be as
basic as offering EDI or electronic funds transfer to streamline administrative operations.
“That allows to cut out those inefficient business transactions in business, so we can lower
costs. “Anything you’re doing to actively manage the relationships, both with your suppliers
and your end-user customers, is supply chain management.”

Customer Management
There are a number of ways to manage customer relationships. For one, activity
based costing techniques can help identify profitable and unprofitable customers. A
relatively new concept called “Customer Relationship Management” can also help.
Distributors can use CRM to track customers’ purchasing needs and buying patterns in an
effort to “develop and refine marketing and sales approaches to targeted customer groups,”
says Skinner. In its most basic form, CRM can be achieved by using historical sales order
data to analyze how individual and groups of customers buy. Order management software
packages allow access to sales history and are available from many software providers.

Small distributors can take advantage of other technologies, as well. One thing they
can do, is link their computer system to their best customers’ systems — without going
through the Internet. This allows the customer direct access to the distributor’s inventory.

Financial Management
 Cash flow is the life and death of distribution

With that in mind, distributors need effective and advanced accounting systems. It’s
important to have a system that tracks pricing, rebates, contracts, discounts, and
receivables and payables, for example. Many software companies offer systems with those
capabilities, specifically designed for distributors. Skinner notes that such tools are
becoming increasingly available and more affordable.

Limited human resources is one of the major hurdles for small distributors. With fewer
people to get the job done, outsourcing non-core business function — collections and
receivables.
 While outsourcing is catching on, many small distributors still feel like they have to
do everything themselves. They equate outsourcing with giving up control over certain parts
of their business. Those fears can be alleviated by finding the right outsource partner — a
specialist the distributor can trust. Another way to tackle the outsourcing issue is to hire
intermittent help-consultants who can help achieve short-term business goals. For example,
distributors can hire someone to do a business analysis and recommend areas for
improvement

Technology and Beyond

 There are many more affordable technology options out there than smaller
distributors realize

Most packages can be purchased individually or as integrated systems to cover all

four-business functions inventory, supplier, customer, and financial management. We also
notes that the Internet has overshadowed the advances in business management software
—and their increasing affordability —.

“E-commerce mania has kicked up a lot of dust, especially in the information

technology space. “In the meantime, the evolution of basic business IT systems has been
ignored by the press and by many business leaders. When the dust settles, distributors will
be pleasantly surprised by the advances in business management software that have been
both enabled by and overshadowed by the Internet.”

Technology is just a tool, “Use technology to make things efficient, but never forget people
to make things effective,”

DISTRIBUTION AND THE SUPPLY CHAIN

Traditionally, distributors have been slow to react to technological change. In a
survey conducted by Industrial Distribution nine yrs ago, only 68% of the distributor
respondents said they were computerized. But distributors appear to be changing their
views on technology. Today, 80% of the respondents to a survey for this article say they
have Web sites and 46% of those distributors have actually sold products from those sites.

Clearly, the Internet is changing the way distributors sell products. It is allowing
distributors, manufacturers, and customers to exchange information for forecasting and
replenishing products on a just-in-time basis. The Internet also has the capability to be the
infrastructure that all of the partners in the channel can use to share real-time information.

THE INTERNET: THREAT OR OPPORTUNITY?

When manufacturers began establishing their own Web sites, many industry
watchers predicted the demise of distributors, as buyers would source products directly.

The vast majority (93%) of distributors told, that they now view the Internet as more
of an opportunity for them rather than a threat to their businesses.

Here are just some of the reasons industrial distributors now view the Internet as an
opportunity.

“The Internet allows us better business exposure, to develop better leads and
allows us to check inventory from our vendors”...

“We can get instant information over the Internet that helps us forecast demand
from our customers through the chain and on to our vendors”...

“The Internet gives us more exposure and our customers’ easier access”...

“This is allowing us to reach new markets and customers and give them more
information about our products and services.”

The Internet, indeed, allows distributors to promote information about their new
products, schedule deliveries, conduct online transfers of funds, collaborate with their
supply chain partners, drive productivity, and improve customer service.
 Many distributors are using the Internet as a sales tool, bringing greater exposure for
their company and allowing them to exchange information throughout the supply chain.

The information/Internet explosion is changing the channel, as customers seek ways

to reduce their costs of procuring product. But true cost savings can only occur when all
parties in the supply chain are linked via data communication. And that means that
distributors, their key manufacturers and customers must trust one another so much that
they are willing to exchange the necessary information to ensure a seamless delivery of
products to the end user/customer.

 Information supplied from a survey of more than 900 distributors in Industrial

Distribution’s 54th Annual of Survey Operations.

THE INFORMATION SYSTEMS & SUPPLY CHAIN

MANAGEMENT
Over the past fifteen years, the development of computer technology and its
application to modern-day business problems has revolutionized the process of
management decision-making. Initially computers were applied in the financial and
accounting sectors but now their impact is felt in nearly every area of the business
organization. This includes the physical distribution function; though it is true to say that
computer development has progressed rather more slowly in this area than in many others.
It is to be hoped that as the supply chain functions receives increasing attention from top
management there will be a corresponding increase in the strategic applications of the
computer to solving distribution problems.

The Changing Pattern of Distribution

The computer is becoming a fact for modern distribution management; it is
necessary to take account of the main changes that have taken place in the pattern of
distribution.
 Firstly, there has been a tremendous increase in the volume of consumer’s goods
distributed. Not only has the volume increased, however, but also so has the range of
merchandise offered and the rate at which it is replaced. New materials, new products and
new sources of supply are being developed continuously and in some trades a proportion
as high as 75 per cent of the merchandise now on display was not on display fifteen years
ago.

Secondly, distributive organizations themselves have been growing rapidly in size. In

the UK six retail companies are responsible over 20 per cent of the market; in Sweden four
organizations account for 70 per cent of the retail grocery trade and Switzerland two
controls over 50 per cent. This trend has developed more in some western European
countries than in others but now it is accelerating everywhere. The number of very large
distributive organizations has doubled over the past fifteen years.

Thirdly, while the volume of goods being distributed has increased and the
organizations themselves have grown in size, there has been a net decline in the number of
wholesale firms and the number of retail outlets. With more goods being distributed by
fewer shops, inevitably there has been a significant increase in the size of the average retail
outlet.

Fourthly, there have been significant changes in the method of selling. Self-service
as a selling technique has grown rapidly.

Fifthly, technological changes in the field of transport and materials handling carry
implications for the distributive trades. These include the development of new warehouses
and new methods of materials handling, the relocation of retail units outside city centers, the
development of air freighting and the realization of through the transport movement based
on containerization, roll-on/roll-off ferry services, the freightliner and piggyback train
network, cellular ships and inland clearance depots.

The Consequent Need for Computers in

Distribution Planning
 One of the main consequences of these changes for the distributor is that he now
needs information of a type, in a form and at a frequency, which is completely new. The
computer is particularly important in this respect because of its ability to deal with thousands
of detail in an orderly and systematic manner.

With the increase in the number of different products and the continual appearance
of new lines and replacement products for obsolescent ones, the distributor, if he is avoid
either over-stocking or serious gaps in his product mix, needs to have access to a
continuous flow of up-to-date information to help his decision making. He needs stock
information on what is moving and what is not; by supplier and by product group.

Equally, with the growth in size of distributive firms, more and more decisions have
to be taken automatically rather than on the basis of a series of individual judgments
coupled with entrepreneurial flair. Analytic techniques are now available to allow those
automatic decisions to be made but this implies that the flow of information is already there.

However the information system actually develops, it is certain that the computer will
play an increasingly important part in it. Also the distribution manager, will, in the future, be
expected to acquire a deeper understanding of the machine’s power and flexibility in dealing
with management problems.

The familiar accounting routines were the first application to be developed and the
main objective was the limited one of the reducing administrative overheads by replacing
clerical effort. As a result, in most of these large organizations, the familiar payroll and sales
and purchase ledger systems have been operating successfully for many years.

The next development in the evolution of computer applications was aimed at

improving some aspect of customer services in order to improve the firm’s competitive
position and increase the market penetration of the firm’s products. Typical objectives were
speedier and more reliable delivery services, a faster process for dealing with customer
inquire and the placing of orders. Attention therefore started to be paid to designing systems
for order processing, inventory control and delivery load planning, all of which had an
impact on the physical distribution function.
 The information generated by these second stage developments led directly to the
third evolutionary stage; the provision of improved decision-making at both strategic and
tactical levels through the building of sophisticated analytical models. This process of model
building involving mathematical and statistical methods requires the service of properly
qualified staff experienced in the use of Operational Research (OR) techniques.

Key Factors in Making Effective Use of

Computers
Firstly, senior management must have an appreciation of what computer can do for
the business. They must be able to approve new computer applications, monitor their
implementation and review them later for effectiveness and efficiency.

Secondly, it is also vital that the next level of line management acquires an
appreciation of the computer in its day-to-day operational role. They will be heavily involved
either as a provider for data input or as a user of output or both.

Thirdly, it must be recognized that computer system evolve over a period of years in
simple, discrete steps and that they are most effective where there are large volumes of
data to be processed or where there is a need for a faster information response.

Fourthly, the firm must take the decision on whether to buy, rent or lease its own
computer or use the services of a computer bureau. The use of a computer bureau is often
an attractive proposition for the medium or small-sized firm which does not have the
financial resources or technical expertise required for the purchase and efficient use of its
own machine.

Fifthly, if the company decides to obtain its own computer, a decision must be taken
as to what hardware facilities to use. There are developing in range and capability at an
increasing rate and any decision taken must be made with a careful eye on any possible
future developments in the computer field.
 Computer Application Packages and Supply
Chain Techniques
Applications packages are computer programs that have been designed and written
in standardized way for applications, which are common to many users. They are ‘ready-
made’ programs that often involve the use of sophisticated analytical models. Any computer
user can therefore exploit this simply by thinking carefully about the nature of his own, say,
distribution problem and then by reading the accompanying manual to see how the package
can help him to solve it.

Packages are often obtained from the manufacturer of the computer being used as
they form part of the computer’s program support services. Packages are also available
from computer bureaux and software houses and the source to select will depend upon the
availability of the type of package required, how effectively each package produces the
desired results and the relative costs.

Application packages cover a wide field including programs for commercial,

scientific, mathematical and technical use. Some packages have been designed specially
for the physical distribution function. One such package is the vehicle-scheduling package,
which has suffered a chequered history of success. Early attempts to solve the problem
took an over-simplified approach and were consequently somewhat remote from the
practical considerations of the route planner and the drivers.

The two main trends can be discerned in the development of analytical techniques in
physical distribution and the corresponding design of application packages. Firstly, more
joint thinking is taking place between the user and the designer of the model. The OR
management scientist is becoming more responsive to the statement of the practically-
minded distribution manager and conversely the manager is coming to accept the model-
builder as a person who genuinely has something to offer in his search to solve his
increasingly complex distribution problem.
 Secondly, many of the models that were developed for planning purposes only are
now being assimilated into the ongoing operational management of the organization. The
impact of the analytical techniques is starting to be felt, therefore, at all level of
management as its become more widely recognized that the practical application of these
techniques cam result in significant cost savings for the company.

SUCCESSFUL SUPPLY CHAIN MANAGEMENT

Required Steps
Integrating information is the first step in supply chain management. You must then
analyze this information to determine which actions to take within the context of automated
business processes. Furthermore, to be most effective this information should automatically
trigger a corresponding product transition. The tight coupling of execution and decision-
making is an essential ingredient to effective supply chain management.

Today's information technologies remove communication barriers, enabling an

improved flow of information among all members of the supply chain. Early adopters of
these technologies have intensified the competitive marketplace in which all businesses
must now operate.

 The most successful companies realize they need a step-by-step approach to chart a
business's course toward high-performance supply chain management. Those
steps include:

 Achieving execution excellence by fully automating and optimizing business practices

 Extending the enterprise to embrace all members of the supply chain

 Integrating business systems with those of customers, suppliers, and partners to

create a common information foundation

 Deploying real-time decision support to increase responsiveness

  Investing in re-educating and re-orienting employees, vendors, and other members of
the supply chain on the practices needed to optimize business processes

 Making a company-wide commitment to creating and managing a more complex

organization capable of tackling global business issues

PARTNERSHIP TO IMPROVE SUPPLY CHAIN

 Processes to solidify and streamline supplier-customer relationships can result in
mutually beneficial commercial success.

Close work can result into highly competitive supply chain while failing to collaborate
results in the distortion of information as it moves through a supply chain, which, in turn, can
lead to costly inefficiencies? Which is called “ Bullwhip Effect” which results in excess
inventories, slow response, and lost profits? Through the more open, frequent and accurate
exchange of information typical of a long-term supply-chain partnership, companies can
eliminate many of these problems and ensure ongoing improvement.

These partnerships yield major benefits: increased market share, inventory

reductions, improved delivery service, improved quality and shorter product development
cycle.

For Partnership
More partnerships that are modest lead to rapid improvements in logistics facillated by candid
information exchange and better coordination. Given the effort involved in crating and sustaining
partnerships, clearly a firm must focus on the trading partners it considers most important in the
long run. This type of partnership differs from a strategic alliance or project-based partnership in
which two firms may work toward a common goal but later dissolve the association after
achieving the goal.

Characteristics of Successful Partnerships

Free exchange of information (e.g., sharing cost and demand data) and coordinated
decision making reduce the inefficiencies inherent in less collaborative relationships. Mutual
trust is crucial to reassuring firms that information shared with a partner will not be used
against them. Longer-term commitment to the partnership encourages parties to invest in
further improvement of the joint supply chain to mutual advantage.

Exit & Voice relationship; firms and suppliers co-operate to resolve problem rather than
abandoning their partnership and over come obstacles.

Logistics Success is defined as the degree to which the overall supply chain is
improved, regardless of how costs and benefits are allocated. Commercial Success
depends on the degree to which trading with the partner in question becomes more
profitable, whether by getting a share of the logistics improvements or by obtaining better
trading terms. A supplier investing substantial effort in a joint supply-chain improvement
project with a customer will almost certainly be aiming for more than potential logistics
improvements; the suppliers wants to solidify its relationship with the customer to gain a
larger market share or reduce price pressure. We can say that sacrificing some short-term
logistics success may be worth achieving commercial benefits later.