what is supply chain

SCM Hand Note 1 M.Adil [email protected]

What is Supply Chain

“Integration of Activities/PROCESS Starts from Suppliers….Supplier To Customers…..Customer”

Always focus on Customer

It’s Management of network of interconnected businesses involved in supply of Product or Service.

It starts from Procurement of Raw Material, Work in Progress Inventory and Transportation of Finished Goods from point of origin to point of consumption.

APICS Definition of Supply Chain

“Design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand and measuring performance globally."

Tech Terms

• Business Plan: Org goals of sale, reasons to attain and plan E.g. Unilever

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THE BASIC SUPPLY CHAINManufacturing Plan & Control

Material Requirement Plan (MRP)

Production Activity Control (PAC)Purchase

BUSINESS PLAN

SALES & OPERATIONS PLAN

MASTER PRODUCTION SCHEDULE (MPS)

Product FlowCash Flow

Information

Physical Supply

Material MgtUp-Stream CustomerInbound Logistics

Physical DistributionDown-Stream Customer

Outbound Logistics

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Sales & Operations Plan: Individual goals/targets for individual products/SBU. E.g. Milk, yog, butter etc.

Master Production Schedule: What we have & what we want to do based on order/demand.

Material Requirement Plan (MRP): What ingredients /components we require for production.

Production Activity Control (PAC): Individual production priority/order

Supply Chain Management: Introduction

Supply chain management now part of the business vocabularies of CEOs, CFOs, COOs, and CIOs during the 1990s. Impact of global marketplace drastically changed the landscape of business.

Change was rapid and continuous in the 1990s. Basic role of internet create rapid change.

Doing business in the comfort zone was no longer synonymous with success.

The Changing Business Landscape: Five Driving Forces

1. The Empowered Consumer

2. Power Shift in the Supply Chain

3. Deregulation

4. Globalization

5. Technology

The Empowered Consumer-

Today, the impact of the consumer is much more direct for supply chains because the consumer has placed increased demands at the retail level for an expanded variety of products and services. For example, year-round availability of fresh fruits and vegetables that are frequently imported, a selection of many different variations of the same basic product, stores being open 24/7.

They have the opportunity to compare prices, quality, and service. Consequently, they demand competitive prices, high quality, tailored or customized products, convenience, flexibility, and responsiveness. They tend to have a low tolerance level for poor quality in products and services. Consumers also have increased buying power due to higher income levels. They demand the best quality at the best price and with the best service. These demands place increased challenges and pressure on the various supply chains for consumer products.

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The demographics of our society with the increase in two-career families and single-parent households have made time a critical factor for many households. Consumers want and demand quicker response times and more convenient offerings according to their schedules. The expectation for service is frequently 24/7 availability with a minimum of wait time.

Increased customer service increases the importance of logistics and supply chains.

Power Shift in the Supply Chain

– Large retailers more demanding and commanding.

– Focus upon distribution costs and their impact on “everyday low prices”.

The large retailers are accorded special consideration from consumer product companies. For example, customized distribution services are provided such as scheduled deliveries, advance shipment notices so forth. These services allow retailers to operate more efficiently and often more effectively. The scale of the retailers can also provide scale economies (read cost savings) to the producers of the products. It can be a win-win arrangement for both sides, with savings passed on to the ultimate customer—the consumer.

In addition to customization, the retailer may be provided value-added services such as vendor-managed inventory (VMI).

Finally, more collaboration is being practiced between organizations in the supply chains to gain mutual cost savings and improved customer service. For example, sharing point-of-sale data is a powerful collaborative tool for mitigating the so-called bullwhip effect in the supply chain, which has multiple benefits to supply chain collaborators.

Deregulation

The various levels of government (federal, state, and local) that establish and administer policies, regulations, and taxes that impact individual businesses and their supply chains. The usually regulate sectors include 4 Pillars, transportation, communications, financial institutions, and utilities, which are cornerstones of the infrastructure for most organizations.Deregulation is the removal of constraints. And results in

Completion increase Prices decrease Open market Consumer empowered

Changes in transportation -fewer or no economic controls over rates and services.Change in financial institutions blurred traditional differences and increased competition.

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Change in the communications industry also resulted in more competitionChanges in the utility industry allows more competition

GlobalizationGlobalization has led to a more competitively intense economic and geopolitical environment. This environment manifests itself in opportunities and threats both

economic and political. Some individuals have implied that there is no“geography”in

the current global environment So, for example, companies seeking to rationalize

their global networks frequently ask such questions as the following:

Where in the world should we source our materials or services? Where in the world should we manufacture or produce our products or services? Where in the world should we market and sell our products or services? Where in the world should we warehouse and distribute our products? What global transportation alternatives should we consider?

Some important issues or challenges for supply chains in the global economy are

(1) more economic and political risk;

(2) shorter product life cycles, and (3) the blurring of traditional organizational boundaries.

TechnologyTechnology has had a major impact on supply chains as a facilitator of change asCompanies have transformed their processes. Technology includes Internet, Software etc.Individuals and organizations are connected 24/7and have access to information on the same basis via the Internet. Search engines such as Google have made it possible to gather timely information quickly. It has been argued that technology has allowed individuals and smaller organizations to connect to the world’s “knowledge pools” to create an unbelievable set of opportunities for collaboration in supply chains.

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The Supply Chain ConceptWhile references to supply chain management can be traced to the 1980s, it was notuntil the 1990s that SCM captured the attention of senior-level executives in major companies. They began to recognize the power and potential impact of SCM in making organizations more globally competitive and enabling their companies to increase their

market share with consequent improvement in shareholder value.Development of the ConceptIt can be argued that supply chain management was not a brand-new concept. Rather,supply chain management represents the third phase of an evolution that started inthe 1960s with the development of the physical distribution concept that focused onthe outbound side of a firm’s logistics system. (See Figure 1.1.) The system relationships

among transportation, inventory requirements, warehousing, exterior packaging, materials handling, and some other activities or cost centers were recognized. For example, the selection and use of a mode of transportation, such as rail, affects inventory, warehousing, packaging, customer service, and materials-handling costs, whereas motor carrier service would probably have a different impact on the same cost centers. The type of product, volume of movement, ship distances, and other factors influence which mode would have the lower total system cost. (This concept will be discussed more in Chapter 2.)The initial focus on physical distribution or outbound logistics was logical since finished goods were usually higher in value, which meant that their inventory, warehousing, materials-handling, and packaging costs were relatively

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higher than their raw materials inputs. The impact of transportation selection was, therefore, usually more significant.Managers in certain industries such as consumer packaged and grocery products, high-tech companies, and other consumer product companies—as well as some academicians—became very interested in physical distribution management. A national organization, the National Council of Physical Distribution Management (NCPDM), was organized to foster leadership, education, research, and interest in this area. The 1980s, as noted earlier, was a decade of change with the deregulation of transportation and financial institutions. The technology revolution was also well under way.During the 1980s, the logistics orintegrated logistics management concept developedin a growing number of organizations. Logistics, in its basic form, added inbound logistics to the outbound logistics of physical distribution (see Figures 1.1 and 1.2). This wasa very logical addition since deregulation of transportation provided an opportunity tocoordinate inbound and outbound transportation movements of large shippers, which

Figure 1-2 Integrated Logistics Management

Figure 1-3Generic Value Chain

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could positively impact a carrier’s operating cost by minimizing empty backhauls, leading to lower rates for the shipper. Also, international or global sourcing of materials andsupplies for inbound systems was growing in importance. Global transportation presented some special challenges for production scheduling. Therefore, it became increasingly apparent that coordination between the outbound and inbound logistics systemsprovided opportunities for increased efficiency and improved customer service.The underlying logic of the systems or total cost concept was also the rationale forlogistics management. In addition, the value chain concept was also developed as a toolfor competitive analysis and strategy. As can be seen in the value chain illustration inFigure 1.3, inbound and outbound logistics are important, primary components of thevalue chain; that is, they can contribute value to the firm’s customers and make the company financially viable to increase sales and improve cash flow. The more integratednature of marketing, sales, and manufacturing with logistics is also an important dimension of the value chain. Logistics authors would usually include procurements an element of logistics, as indicated in Chapter 2, but the value chain depicts it as a supportactivity for all the primary activities since they all may do some purchasing of servicesand materials. The rationale for the former is the opportunity for tradeoff analysisbetween procurement quantities, transportation volumes, inventory levels, and otherrelated costs across the value chain, as explained in the MOM example.As already stated, supply chain management came into vogue during the 1990s andcontinues to be a focal point for making organizations more competitive in the globalmarketplace. Supply chain management can be viewed as a pipeline or conduit for theefficient and effective flow of products, materials, services, information, and financialsfrom the supplier’s suppliers through the various intermediate organizations or compa-nies out to the customer’s customers (see Figure 1.4), or a system of connected networksbetween the original vendors and the ultimate final consumer. The extended enterpriseperspective of supply chain management represents a logical extension of the logisticsconcept, providing an opportunity to view the total system of interrelated companiesfor increased efficiency and effectiveness.

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Figure 1-4 Logistics Supply Chain

The Changing Business Landscape: The Supply Chain Concept• Business Case for Supply Chain Management: Why so much attention on supply chain

management?– ECR and Best-in-class studies (see next two slides)– Complexity of the supply chain– Extended enterprise concept– Two-way flow of:

• Products• Information• Cash

– Inventory visibility

Before discussing and analyzing the supply chain concept in more detail, it is worth noting that a growing number of terms used by individuals and organizations are presented as being more appropriate, comprehensive, or advanced than supply chain management. Such terms include demand chain management, demand flow management, value chain management, value networks, and synchronization management. Supply chain managementis viewed by some individuals to be narrowly focused upon supplies and materials, not demand for finished products.The definition of supply chain management proposed in this book is broad and comprehensive; therefore, demand and value are relevant as well as synchronization of flowsthrough the pipeline or supply chain. Thus, it could be argued that supply chain, demandchain, value network, value chains, and other terms can be used as synonyms. Also, thereappears to be a more widespread use and acceptance of the term supply chain management and the comprehensive viewpoint of supply chain management espoused in thischapter and throughout the book. A logical question to be asked is why supply chain management attracted attention among CEOs, CFOs, COOs, CIOs, and other senior executives. A myriad of reasons can be given, but the business case for supply chain management was initially demonstrated by two well-known studies. In the early 1990s, the Grocery Manufacturer’s Association (GMA) commissioned a study by one of the large supply chain consulting organizations to research and analyze the supply chains of grocery manufacturers. Figure 1.5 illustrates one of the major findings of the study: on average, the industry had 104 days of inventory in its outbound supply chains. The consulting company recommended a set of initiatives that would lead to reducing that to 61 days of inventory. There are two important points here. First, it was estimated that at least $30 billion per year would be saved by reducing pipe-line inventory to 61 days. Such savings had the potential of having a significant impactupon consumer prices, or what might be called“landed prices.”Second, this study only

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considered part of the supply chain, and therefore understated the total potential. Thepotential savings of $30 billion demonstrated the power of optimizing the supply chainFigure 1-5: Comparison of Average Throughput Time of Dry Grocery Chain before and after ECR Implementation

as opposed to just one individual company or one segment of the supply chain. The lat-ter perspective often results in suboptimization of the whole supply chain with subse-quent higher overall costs.The other example of the importance of focusing upon the supply chain came fromthe Supply Chain Council, which published a comparison for 1996 and 1997 of the“best-in-class”companies (top 10 percent) and the median companies that were report-ing their metrics to the council. As can be seen from Figure 1.6, in 1996, the supplychain–related costs of the best-in-class (BIC) companies were 7.0 percent of total sales,while the median company experienced 13.1 percent. In other words, the best-in-classcompanies spent 7.0 cents of every sales or revenue dollar for supply chain–relatedcosts, while the median company spent 13.1 cents of every sales dollar on supplychain–related costs. In 1997, the respective numbers were 6.3 percent and 11.6 percentfor best-in-class companies versus median companies. If we take a simple application ofthese numbers for a hypothetical company with $100 million in sales in 1997, being bestin class would mean an additional $5.3 million of gross profit to an organization, whichfrequently would be the equivalent profit from an additional $80 to $100 million of sales.At this point, a more detailed analysis and discussion of the supply chain is appropri-ate. Figure 1.7 presents a simplified, linear example of a hypothetical supply chain.Real-world supply chains are usually more complex than this example because theymay be nonlinear or have more supply chain participants. Also, this supply chaindoes not adequately portray the importance of transportation in the supply chain.In addition, some companies may be part of several supply chains. For example,chemical companies provide the ingredients for many different products manufacturedby different companies.

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Figure 1-7: Integrated Supply Chain

Figure 1.7, however, does provide sufficient perspective to understand the basics of asupply chain. The definition that is a part of the illustration indicates several importantpoints. A supply chain is an extended enterprise that crosses the boundaries of individual firms to span the related activities of all the companies involved in the total supplychain. This extended enterprise should attempt to execute or implement a coordinated,two-way flow of goods and services, information, cash, and demand. The four flows enumerated at the bottom of the illustration are important to the success of supply chainmanagement (see Figure 1.8). Integration across the boundaries of several organizationsin essence means that the supply chain needs to function similar to a single organizationin satisfying the ultimate customer.The top flow—products and related services—has traditionally been an important

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Figure 1-6: Total Supply Chain

Management Cost --- All Sectors

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1996 1997

Best-in-classMedian

Rev

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focus of logisticians and is still an important element in supply chain management.Customers expect their orders to be delivered in a timely, reliable, and damage-free manner, and transportation is critical to this outcome. Figure 1.7 also indicates that productflow is a two-way flow in today’s environment because of the growing importance ofreverse logistics systems for returning products that are unacceptable to the buyerbecause they are damaged, obsolete, or worn out. There are numerous reasons for thisgrowth in reverse systems, which are explored in Chapter 15, but there is no questionthat it is a growing phenomenon of supply chains. Note also that networks for reversesystems usually have to be designed differently than forward systems.

Characteristics of Supply Chain Management– Inventory

• Visibility• Pull systems

– Landed Cost• Companies must realize that their strategies may affect the landed cost.• Coordination of supply chain activities may lower the landed cost.

– Real-time two way information flows– Customer service

• levels must be tailored to each customer• not all customers require the same service

– Supply chain relationships• Collaborative planning• Share risks and rewards

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