Supply Chain Management

Dr Prashant Gupta
LBSIM
Business Challenges for Becoming World
Class
- Fast Pace of Change (Discontinuity Rather Than
Change)
- International Competition
- Managing Global Networks
- Achieving Appropriate Quality
- Managing a Diverse Workforce
- Conforming to Environmental Constraints, Ethical
standards, and Government Regulations
- Developing and Integrating New Process
Technologies into Existing Production Systems
- Understanding Customers
Business Challenges in the 21st Century
Managing Uncertainty:

- Uncertainty in Business environment.

- Difficult to predict changes in the competitive
environment.

- Customers are becoming competitors,
competitors are becoming partners, and
unconventional competition is emerging.
Business Challenges in the 21
st
Century
Understanding Globalization of
Business:

- Globalization is defined as a process which
cuts across national boundaries, integrating
and connecting communities in new space-
time combinations.

Business Challenges in the 21
st
Century
Understanding Customers:

- Understand the customers needs and translate
them into a unique value-added business
mission.

Height of Globalization
An English princess with an Egyptian
boyfriend crashes in a French Tunnel,
driving a German Car with a Dutch Engine,
driven by a Belgian who was high on
Scottish Whiskey, followed closely by Italian
Paparazzi, on Japanese Motorcycles,
treated by an American Doctor, using
Brazilian medicines!
Where is Indian Business today ?
In the midst of a Transformation Era

Needs Transformational Leaders
who, besides being capable , would look
beyond tomorrow also.
Keys to improving performance of
organizations
1. The Learning Organization
2. Stakeholders Satisfaction
3. Business Process Reengineering
4. From Fixed to Flexible Structures
5. Outsourcing
6. Exploiting Information Technology ( I T ) and
Enterprise Resource Planning ( ERP )
7. Employees Involvement
8. Role of Managers / Entrepreneurs
9. Productivity Improvement
10. Infusing Philosophy of Total Quality Management
1. The Learning Organization
Continuous Learning
Learn to Unlearn and Relearn
Re-skilling and Multi-skilling
Nurture Creativity
Implement Knowledge Management Systems
e.g.
Reliance : Textiles to polyesters to
petrochemicals to world-scale refineries to
exploration and production to
telecommunication and now to retailing, health
care et al.
2. Stakeholders Satisfaction
Stakeholders include shareholders, suppliers,
channel partners, public at large and
employees with customers at the core.

Stakeholders satisfaction is key to an
organizations success and hence there is
need to have an holistic approach.
3. Business Process Reengineering-
People and Systems
BPR is change in mindsets bringing about
changes in systems, and the way work is
organized.

Challenge for managers is to steer BPR and its
accompanying physical and psychological
adjustments and pains skillfully.
BPR Philosophy
Does the reengineering consultant see the glass
as half full or half empty?





BPR Philosophy
Does the reengineering consultant see the glass
as half full or half empty?




Neither.
Its the wrong size of glass!
4. From Fixed to Flexible Structures
Strong functional barricades must be
removed and replaced by a more flexible
and dynamic organization with focus on
cross-functional team-work and flat
hierarchical structures.
5. Outsourcing

Outsourcing is defined as the act of moving a
firms internal activities and decision
responsibility to outside providers.
Outsourcing as a Business Strategy
Till recently make-or-buy decisions were
considered as part of production. Outsourcing is
now gaining acceptance as a key business
strategy.

Outsourcing decisions should not be based on
historical considerations but on Competencies
considerations.
Reasons to Outsource
Organizationally-driven
Improvement-driven
Financially-driven
Revenue-driven
Cost-driven
Employee-driven
Reasons for Outsourcing
Cost reduction
Head-count reduction
Focus on core competencies
Acquire and deploy peripheral knowledge or
process technology
Minimize inventory, materials handling, and
other non-value-adding costs
Reduce development and production cycle
times
Improve efficiency
Positive media reports (Brand Building)
Risks of Outsourcing
Loss of control
Higher exit barriers
Exposure to supplier risk:
Financial weakness, loss of commitment to outsourcing,
slow implementation, promised features not available, lack
of responsiveness, poor daily quality.
Unexpected fees or extra use charges
Difficulty in quantifying economics
Conversion costs
Supply restrictions
Attention required by senior management
Possibility of being tied to obsolete technology
Concerns about long-term flexibility and meeting changing
business requirements
6. IT, ERP & SCM
IT, ERP and SCM can be major Force Multipliers
in productivity enhancement.

Develop Enterprise Resource Planning ( ERP )
and Supply Chain Management (SCM ) Systems
to reach the customers faster.

6. IT, ERP & SCM
As IT breaks down the barriers of time and location,
distinction between large and small companies are
also breaking down.
Small, agile firms are now effectively competing
with industry giants because IT can make a
consortium of small firms look, feel and get big,
reaching for customers once beyond their grasp.
Companies will have to use IT into their entire
product process (including research, design,
manufacturing, distribution, marketing and after
sales service)
How the Net is changing SCM
Pre-determined pricing is giving way to auction-based
bidding for the best price.
Sourcing is becoming global as suppliers all over the
world sell on the Net.
Long-term partnerships with vendors are making room
for deal-to-deal relationships.
Buyers are being forced to compete with one another to
secure the best and cheapest suppliers.

What is Supply Chain Management?
Definition:
Supply Chain Management is primarily concerned with
the efficient integration of suppliers, factories,
warehouses and stores so that merchandise is
produced and distributed in the right quantities, to the
right locations and at the right time, and so as to
minimize total system cost subject to satisfying
customer service requirements.

Value Contribution of
Synchronized Production
PURCHASE MANUFACTURE DISTRIBUTE
Non durable Consumer goods (FMCG) E.g.. Toothpaste, Soap
Durable White goods E.g.. Washing Machine
Heavy Manufacturing E.g.. Industrial Equipment
30 to 50 % 5 to 10 % 30 to 50 %
60 to 70 % 10 to 15 % 10 to 25 %
30 to 50 % 30 to 50 % 5 to 10 %
11%
31%
58%
Material
Dir Wages
Other
71%
16%
13%
COGS
Payroll
Other
83%
9%
8%
COGS
Payroll
Other
Manufacturing
Wholesale
Retail
Material Costs in Supply-Chain
Supply-chain is a term that describes how
organizations (suppliers, manufacturers,
distributors, and customers) are linked together
What is a Supply-Chain?

Suppliers

Inputs

Suppliers
Service support
operations

Transformation

Manufacturing
Local
service
providers
Localization

Distribution
Customers

Output

Customers
Services
Supply networks
Manufacturing
Flows in a Supply Chain
Customer
I nformation
Product
Funds
Consumer
Retailer
Manufacturing
Material Flow
VISA

Credit Flow
Supplier
Supplier Wholesaler
Retailer
Cash
Flow
Order
Flow
Schedules
The Supply-Chain
Flow of Value (Goods & Services)

Flow of Information
Flow of Information
Flow of Finance
Supplier
Manu-
facturer
Branch/
CFA
Wholesaler/
Retailer

Customer

T= Transporter
T T
T
Supply Chain Management
Design and Operation of the Physical,
Managerial, Informational and Financial
Systems needed to transfer Goods and
Services from VENDOR TO CUSTOMER
(point of production to point of consumption) in
an Efficient and Effective manner.

EFFICIENT : Doing Things Rightly
Productivity Maximization
Cost Minimization
Supply Driven

EFFECTIVE: Doing Right Things
Quality, Flexibility, Service Level
Profit Maximization
Customer (Demand) Driven

FIRM INFRASTRUCTURE

HUMAN RESOURCE MANAGEMENT

TECHNOLOGY DEVELOPMENT

PROCUREMENT


INBOUND OPERATIONS OUTBOUND MARKETING SERVICE AND
SALES
LOGISTICS LOGISTICS

MARGIN
MARGIN

SUPPORT
ACTIVITIES

PRIMARY ACTIVITIES
The Generic Value Chain

Supply Chain Macro Processes in a Firm
Customer Relationship Management (CRM):
All processes that focus on the interface between the firm
and its customers.e.g. Market, Sell, Call Center, Order
Management, Field Services.
Internal Supply Chain Management (ISCM):
All processes that are internal to the firm.e.g. Strategic
Planning, Demand Planning, Supply Planning, Fulfillment.
Supplier Relationship Management (SRM):
All processes that focus on the interface between the firm
and its suppliers.e.g.Source,Negotiate, Buy, Design
Collaboration, Supply Collaboration.
Process View of a Supply Chain
Cycle view:
Processes in a supply chain are divided into a series of
cycles, each performed at the interfaces between two
successive supply chain stages.
Push/Pull view:
Processes in a supply chain are divided into two
categories depending on whether they are executed in
response to a customer order (pull) or in anticipation of
a customer order (push).
Cycle View of a Supply Chain
Each cycle occurs at the interface between two
successive stages
Customer order cycle (customer-retailer)
Replenishment cycle (retailer-distributor)
Manufacturing cycle (distributor-manufacturer)
Procurement cycle (manufacturer-supplier)
Cycle view clearly defines processes involved and the
owners of each process. It specifies the roles and
responsibilities of each member and the desired
outcome of each process.
Cycle View of Supply Chains
Customer Order Cycle
Replenishment Cycle
Manufacturing Cycle
Procurement Cycle
Customer
Retailer
Distributor
Manufacturer
Supplier
Customer Order Cycle
Involves all processes directly involved in
receiving and filling the customers order
Customer arrival
Customer order entry
Customer order fulfillment
Customer order receiving
Replenishment Cycle
All processes involved in replenishing retailer
inventories (retailer is now the customer)
Retail order trigger
Retail order entry
Retail order fulfillment
Retail order receiving

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

Procurement Cycle
All processes necessary to ensure that materials are
available for manufacturing to occur according to
schedule.
Manufacturer orders components from suppliers to
replenish component inventories.
Component orders can be determined precisely from
production schedules (different from retailer /
distributor orders that are based on uncertain
customer demand).
Important that suppliers be linked to the
manufacturers production schedule.
Push/Pull View of
Supply Chain Processes
Supply chain processes fall into one of two categories
depending on the timing of their execution relative to
customer demand
Pull: Execution is initiated in response to a customer
order (reactive)
Push: Execution is initiated in anticipation of customer
orders (speculative)
Push/pull boundary separates push processes from pull
processes
Push/Pull View of Supply Chains
Procurement,
Manufacturing and
Replenishment cycles
Customer Order
Cycle
Customer
Order Arrives
PUSH PROCESSES PULL PROCESSES
Push/Pull View of
Supply Chain Processes
Useful in considering strategic decisions relating to
supply chain design more global view of how supply
chain processes relate to customer orders
Can combine the push/pull and cycle views
L.L. Bean (Mail Order Company)
Dell (Make-To-Order Company)
The relative proportion of push and pull processes can
have an impact on supply chain performance
Challenges for Supply Chain Management
Global Competition
Shorter Product Life Cycle
New, Low-Cost Distribution Channels
More Powerful Well-informed Customers
Internet and E-Business Strategies
Supply Chain Challenges
Achieving Global Optimization (Within Supply Chain):
Complex network of facilities
Conflicting Objectives in the Supply Chain
Supply Chain is a dynamic system
System Variations over time
Managing Uncertainty:
Matching Supply and Demand
Inventory and back order levels fluctuate across the supply
chain
Demand forecasting does not solve the problem
Demand is not the only source of uncertainty
Conflicting Objectives in the Supply Chain
1. Purchasing (Suppliers requirements)
Stable volume requirements
Flexible delivery time
Little variation in mix
Large quantities

2. Manufacturing
Long run production
High quality
High productivity
Low production cost
Conflicting Objectives in the Supply Chain
3. Warehousing
Low inventory
Reduced transportation costs
Quick replenishment capability

4. Customers
Short order lead time
High in stock
Enormous variety of products
Low prices

Procurement
Planning
Manufacturing
Planning
Distribution
Planning
Demand
Planning
Sequential Optimization
Supply Contracts/Collaboration/Information Systems and DSS
Procurement
Planning
Manufacturing
Planning
Distribution
Planning
Demand
Planning
Global Optimization
Sequential Optimization vs.
Global Optimization
Source: Duncan McFarlane

Daisy-Chained Value Chains
We, our co-hosts
and competitors
Customers
Customer's
Customers
Suppliers
Supplier's
Suppliers
Traditional Value Chains are Fragmenting
into an Extended Enterprise Model
The value chains as we know them fragment.
Extended enterprise management results.
Only processes that add value to the customer survive!
Uncertainty In Supply Chain
Wrong forecasts
Late deliveries
Poor quality
Machine breakdowns
Cancelled orders
Erroneous information
The Dynamics of the Supply Chain
O
r
d
e
r

S
i
z
e

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
Customer
Demand
Retailer Orders
Distributor Orders
Production Plan
The Dynamics of the Supply Chain
O
r
d
e
r

S
i
z
e

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
Customer
Demand
Production Plan
Bullwhip Effect
Time
Retailers Orders
Time
Wholesalers Orders
Time
Manufacturers Orders
The magnification of variability in orders in the supply-
chain
A lot of
retailers each
with little
variability in
their orders.
can lead to
greater variability
for a fewer number
of wholesalers,
and
can lead to
even greater
variability for a
single
manufacturer.
Key Supply Chain Management Issues
Chain Global
Optimization
Managing
Uncertainty
Distribution Network Configuration Supply Y
Inventory Control Supply Y
Production Sourcing Supply Y
Supply Contracts Both Y Y
Distribution Strategies Supply Y Y
Strategic Partnering Development Y
Outsourcing and Offshoring Development Y Y
Product Design Development Y
Information Technology Supply Y Y
Customer Value Both Y
Smart Pricing Supply Y
Strategic Systems And The Value Chain
Something old, something new!
Suppliers
Infrastructure
Management/Planning
Finance/Accounting
Human Resources
Information Systems
Product
Development
Manu-
facturing
Distribution
Marketing
& Sales
Service Customers
Customers
Customer
Supply Chain Management / Computer Integrated Manufacturing
Global Communications
Quality
Control
Manage
Inventory
For
Customers
Order
Entry
Help
Distributors
With
Information
Empower
Sales
Force
e-Marketing
Empower
Customer
Service
Help
Customers (and
Beyond) in
Their Business
Optimize
Orders/
Stock
Choosing Machines
Service
Information
Customized Products/Services
Help
Supplier
Manage
Their
Business
Sell
Databases
And
Know-How
Enhance
Products
With
Information
Desired Objectives of a Supply Chain
Sources of supply chain revenue:
- the customer
Sources of supply chain cost:
- flows of information, products, or funds
between stages of the supply chain
Desired Objectives of a Supply Chain
Maximize overall value created
Supply chain value: Difference between what the
final product is worth to the customer and the
effort the supply chain expends in filling the
customers request
Value is correlated to supply chain profitability
(difference between revenue generated from the
customer and the overall cost across the supply
chain)

Desired Objectives of a Supply Chain
Example: LENOVO receives Rs 40,000 from a
customer for a computer (revenue).
Supply chain incurs costs (information, storage,
transportation, components, assembly, etc.)
Difference between Rs 40,000 and the sum of all of
these costs is the supply chain profit
Supply chain profitability is total profit to be shared
across all stages of the supply chain
Supply chain success should be measured by total
supply chain profitability, not profits at an individual
stage
The Importance of Supply Chain Flows
Close connection between design and management
of supply chain flows (product, information, and
cash) and supply chain success.
Dell: success (Build to Order Company)
E-business failures due to problems with the design
and management of supply chain flows.
Amazon.com: Success
Supply chain decisions can play a significant role in
the success or failure of a firm
Decision Phases of a Supply Chain
Supply Chain Strategy or Design
Supply Chain Planning
Supply Chain Operation
Supply Chain Decisions
Strategy
(Design)
Planning
Operation
Supply Chain Strategy or Design
Decisions about the structure of the supply chain and what
processes each stage will perform
Strategic supply chain decisions
Locations and capacities of facilities
Products to be made or stored at various locations
Modes of transportation
Information systems
Supply chain design must support strategic objectives
Supply chain design decisions are long-term and expensive
to reverse must take into account market uncertainty
Supply Chain Planning
Definition of a set of policies that govern short-
term operations.
Fixed by the supply configuration from Design
Phase.
Starts with a forecast of demand in the coming
year.
Supply Chain Planning
Planning decisions:
Which markets will be supplied from which locations
Planned buildup of inventories
Subcontracting, backup locations
Inventory policies
Timing and size of market promotions
In planning decisions we must consider demand
uncertainty, exchange rates, competition over
the time horizon(normally one year).
Supply Chain Operation
Time horizon is weekly or daily.
Decisions regarding individual customer orders.
Supply chain configuration is fixed and operating policies are
determined.
Goal is to implement the operating policies as effectively as
possible.
Allocate orders to inventory or production, set order due
dates, generate pick lists at a warehouse, allocate an order
to a particular shipment, set delivery schedules, place
replenishment orders.
Much less uncertainty (short time horizon).
Measuring Supply Chain Performance
Cost
Quality
Time
Delivery

Formulas for Measuring Supply-Chain
Performance
One of the most commonly used measures in all of operations
management is Inventory Turnover



In situations where distribution inventory is dominant, Weeks of
Supply is preferred and measures how many weeks worth of
inventory is in the system at a particular time


value inventory aggregate Average
sold goods of Cost
turnover Inventory
weeks 52
sold goods of Cost
value inventory aggregate Average
supply of Weeks

Example of Measuring Supply-Chain

Performance
Suppose a companys new annual report claims
their costs of goods sold for the year is Rs 160
Crores and their total average inventory (production
materials + work-in-process) is worth Rs 35 Crores.
This company normally has an inventory turn ratio
of 10. What is this years Inventory Turnover
ratio? What does it mean?
Example of Measuring Supply-Chain Performance
(Continued)
= 160 / 35
= 4.57

Since the companys normal inventory turnover ration is 10, a
drop to 4.57 means that the inventory is not turning over as
quickly as it had in the past. Without knowing the industry
average of turns for this company it is not possible to comment
on how they are competitively doing in the industry, but they now
have more inventory relative to their cost of goods sold than
before.
value inventory aggregate Average
sold goods of Cost
turnover Inventory
Benchmarking Supply Chain Management

Typical
Firms
Benchmark
Firms
Number of suppliers per
purchasing agent
34 5
Purchasing costs as percent of
purchases
3.3% 0.8%
Lead time (weeks)
15 8
Time spent in placing order
42 minutes 15 minutes
Percentage of late deliveries
33% 2%
Percentage of rejected material
1.5% .0001%
Number of shortages per year
400 4