SUPPLY CHAIN MANAGEMENT

Objective  Maximise the overall value generated – is the difference between what
the final product is worth to the customer and the effort the supply chains
expends in filling the request of the customer

 Supply chain profitability is the difference between the revenue

generated from the customer and the overall cost across the supply
chain

 It is the total profit to be shared across all supply chain stages

 Supply chain success is measured in terms of supply chain profitability

and not in terms of the profits at an individual stage

 Revenue is from customer – positive cash flow

 All other cash flows are simply fund exchanges that occur within the
supply chain given that different stages have different owners

 All flows of information, product or funds generates costs within the supply
chain

 Supply chain management involves the management of flows between

and among stages in a supply chain to maximise total supply chain
profitability
Decision Phases
Three categories - Depending on the frequency of each decision and the
time frame over which a decision has an impact,
Supply chain
strategy or design
Supply chain
planning
Supply chain operation
Supply chain strategy
 Decides how to structure the supply chain over the next several years
- chain configuration,
- resource allocated and
- process at each stage should perform
 Decisions include
- location and capacities of production and warehousing facilities,
- the products to be manufactured or stored at various locations,

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National Institute of Technology Calicut Department of Mechanical Engineering
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h - the type of information system to be utilised
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National Institute of Technology Calicut Department of Mechanical Engineering
Supply chain planning
 Under the given configuration decisions are made which has impact on a time frame of
quarter to a year
 Starts with a forecast the coming year or a comparable time frame
 Planning decisions include
– which market will be supplied from which locations,
– the subcontracting for manufacturing,
– the inventory policies to be followed, and
– the timing and size of marketing promotions
 Companies in the planning phase try to incorporate any flexibility built into the supply
chain in the design phase and exploit it to optimise performance
 Companies define a set of operating policies that govern short-term operations
Supply chain operation
 Decisions are taken regarding individual customer order and the time frame is week or
days
 Configuration is fixed and policies are defined
 Objective is to handle incoming customer orders in the best possible manner
 Decisions related with
– allocation of inventory or production to individual orders,
– set a date that an order is to be filled,
– generate pick lists at a warehouse,
– allocate an order to a particular shipping mode and shipment,
– set delivery schedules of trucks, and
– place replenishment order
 Exploit the reduction in uncertainty and optimise performance

Process View of Supply Chain

 A supply chain is a sequence of processes and flows that take place within and between
different stages and combine to fill a customer need for a product
 Two ways to view the processes performed in a supply chain
Cycles view and
Push/pull view
Cycle view
 Defines the processes involved and the owners of each process
 Process in a supply chain are divided into a series of cycles

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National Institute of Technology Calicut Department of Mechanical Engineering
 Cycles are performed at the interface between two successive stages of a supply chain
 Supply chain process can be broken down into four process cycles such as
– Customer order cycle
– Replenishment cycle
– Manufacturing cycle
– Procurement cycle
 Each cycles occurs at the interface between two successive stages of the supply chain
 A cycle view of the supply chain is very useful when considering operational decisions
 It clearly specifies the roles and responsibilities of each member of the supply chain
 It helps the designer to consider the infrastructure required to support the processes
Customer

Customer Order Cycle

Retailer

Replenishment Cycle

Distributor

Manufacturing Cycle

Manufacturer

Procurement Cycle
Supplier

Fig 1: Supply Chain Process Cycles

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National Institute of Technology Calicut Department of Mechanical Engineering
Fig. Customer Order Cycle

Fig 2: Replenishment Cycle

Fig 3: Manufacturing Cycle

 Fig 4: Procurement Cycle

Push/Pull View
 Categorises processes in a supply chain based on whether they are initiated in response to
a customer order (pull) or in anticipation of a customer order (push)
 Categorisation is based on the timing of process execution relative to end customer
demand
 At the time of execution of a pull process customer demand is known with certainty
 In case of push process at the time of execution of a process demand is not known and
must be forecasted
 Pull process – reactive process
 Push process – speculative process
 Push/pull boundary in a supply chain separates push process from pull process
 Very useful when considering strategic decisions relating to supply chain
 Forces more global consideration of supply chain processes as they relate to a customer
order
 More the pull process better the supply chain
 Customer
Customer Order and Manufacturing Cycle

Manufacturer (Dell)

Procurement Cycle Supplier

Fig 5: Dell Supply Chain

Customer PULL
Order and PROCESS
Manufacturing
Cycle
Customer Order and Manufacturing Cycle

Customer
Order Arrives

PUSH Procurement Cycle

Procurement PROCESS
Cycle

Fig 6: Push/Pull Processes of Dell Supply Chain

COMPETITIVENESS AND SUPPLY CHAIN

STRATEGIES
 Competitive strategy of a company defines the set of customer needs that it seeks to
satisfy through its products and services
 Defined based on how customer prioritises product cost, delivery time, variety and quality
 Targets one or more customer segments and aims to provide products and services that
satisfy these customer’s needs
 Some company’s competitive strategies are defined around the following
– High availability of a variety of reasonable quality products at low prices – eg:
Wal-Mart
 – Better customer convenience, availability and responsiveness – eg: McMaster
Carr – MRO items - over 200,000 items through catalog and web site
– Better customisation, and variety at reasonable cost – eg: Dell
 To execute a competitive strategy of a company, all the functions play a role and each
must develop its own strategy
 Supply chain strategy determines
– the nature of procurement of raw materials,
– transportation of materials to and from the company,
– manufacture of the product or operations to provide the service, and
– distribution of the product to the customer, along with any follow-up service
 This strategy includes what many traditionally include
– Supplier strategy
– Operations strategy, and
– Logistics strategy
 Decisions regarding inventory, operating facilities, transportation, and information flows
in the supply chain are all part of supply chain strategy
Achieving Strategic Fit
 Strategic fit means that both the competitive and supply chain strategies have the same
goal
 It refers to consistency between
– The customer priorities that the competitive strategy hopes to satisfy and
– The supply chain capabilities that the supply chain strategy aims to build
 Major task of chief executive officer (CEO) is aligning all of the core strategies with the
overall competitive strategy to achieve strategic fit
 During the supply chain design a key consideration is the strategic fit
 A company’s success or failure closely linked to the following
1. The competitive strategy and all functional strategies must fit together to form a
coordinated overall strategy
2. Different functions in a company must appropriately structure their process and
resources to be able to execute these strategies successfully
 Basic steps to achieve strategic fit
1. Understanding the customer, and supply chain uncertainty
2. Understanding the supply chain capabilities
3. Achieving strategic fit
Understanding the Customer and Supply Chain Uncertainty
 To understand the customer, a company must identify the needs of the customer segment
being served
 Customer demand from different segments may vary along several attributes:
1. The quantity of the product needed in each lot
2. The response time that customers are willing to tolerate
3. The variety of products needed
4. The service level required
5. The price of the product
6. The desired rate of innovation in the product
Implied Demand Uncertainty
 Demand uncertainty reflects the uncertainty of customer demand for product
 Implied demand uncertainty is the uncertainty in meeting a portion of customer demand
and it is the uncertainty the supply chain faces.
 It is mainly due to the attributes the customer desires
Illustration
As a supply chain raises its service level, it must be able to meet a higher and higher
percentage of actual demand, forcing it to prepare for rare surges in demand.
Thus raising the service level increases the implied demand uncertainty even though
the product’s underlying demand uncertainty does not change.
 Product demand uncertainty and various customer needs that the supply chain tries to fill
affect implied demand uncertainty
 The following customer needs increases implied demand uncertainty
– Range quantity required increases
– Lead time decreases
– Variety of products required increases
– Number of channels through which product may be acquired increases
– Rate of innovation increases
– Required service level increases
Correlation between implied demand uncertainty and other attributes
Low Implied High Implied
Uncertainty Uncertainty

Product margin Low High

Average forecast error 10% 40% to 100%
Average stockout rate 1% to 2% 10% to 40%
Average forced season
end markdown 0% 10% to 25%
 Following supply source capabilities increase the supply uncertainty and hence high
implied demand uncertainty
Frequent breakdown
 Unpredictable and low yields
Poor quality
Limited supply capacity
Inflexible supply capacity
Evolving production process
 Implied uncertainty spectrum shows in one end predictable supply and demand, and in the
other end highly uncertain supply and demand
Understanding the supply chain
 Important supply chain characteristics are responsiveness and efficiency
 Supply chain responsiveness includes a supply chain’s ability to do the following
 Respond to wide range of quantities demanded
 Meet short lead time
 Handle a large variety of products
 Build highly innovative products
 Meet a very high service level
 Handle supply uncertainty
 Supply chain efficiency is the cost of making and delivering a product to the customer
 Cost-responsiveness efficient frontier is the curve showing the lowest possible cost for a
given level of responsiveness
 Shows the cost-responsiveness performance of the best supply chain
 Firms on the efficient frontier are also continuously improving their processes and
changing technology to shift the efficient frontier itself

Responsiveness

Low
High Low
Cost
Fig 7: Cost – Responsiveness efficient frontier
 Responsiveness spectrum - Supply chains range from those that focus solely on being
responsive to those that focus on a goal of producing and supplying at the lowest possible
cost
Achieving Strategic Fit
 Strategic fit is achieved if what the supply chain does particularly well is consistent with
the targeted customer’s needs and the uncertainty of the supply chain

Responsive
Supply Chain

Responsiveness
Spectrum
Efficient
Supply Chain
Zone of strategic fit
Certain Implied Uncertain
Demand Uncertainty Demand
Spectrum
Fig 8: Finding the zone of strategic fit
 For high level of performance, companies should move their competitive strategy (and
resulting implied uncertainty) and supply chain strategy (and resulting responsiveness)
towards the zone of strategic fit
 To achieve complete strategic fit, a firm must consider all functional strategic within the
value chain
Comparison of efficient and responsive supply chains
Primary goal lowest cost Respond quickly

Product design Max. performance Modularity-

strategy at a min. cost postponement

Pricing strategy Lowe margin High margin

Mfg. Strategy Lower cost Capacity flexibility
Inventory Strategy Minimise Buffer inventory

Lead time strategy Reduce- not at the Aggressively

expense of cost reduce

Supplier strategy Cost and quality Speed, flexibility,

reliability, quality

Other Issues Affecting Strategic Fit

 Multiple products and customer segments
 Product life cycle
 Competitive change over time
Multiple Products and Customer Segments
 Firms often sells multiple products and serves customer segments with very different
needs
 Different products and segments have different implied demand uncertainty
 Key issue for company is to create a supply chain that balances efficiency and
responsiveness given its portfolio of products, customer segments and supply sources
 Several possible routes a company can take
 One route – set up independent supply chains for each different product or
customer segment
 Feasible if each segment is large enough to support a dedicated supply
chain
 Preferable strategy is to tailor the supply chain to best meet the needs of each
product’s demand
 Tailoring the supply chain requires some links in the supply chain with
some products, while having separate operations for other links –
considering efficiency and responsiveness
Product Life Cycle
 As product go through their life cycle, the demand characteristics and the needs of the
customer segments being served change
  As product mature, the corresponding supply chain strategy should, in general, move
from being responsive to being efficient

Responsive

Responsiveness
Spectrum
Zone of strategic fit

Efficient

Product Implied Product

Maturity Uncertainty Introduction
Spectrum
Fig 9: Changes in supply chain strategy over a product life cycle
Competitive Change Over Time
 Competitor can change the landscape of the market
 Growth of mass customisation – competitors flood the marketplace with
product variety, customers are becoming accustomed to having their
individual needs satisfied
 Competitive focus today is on producing sufficient variety at a reasonable
price
 As competitive landscape changes, a firm is forced to alter its competitive strategy –result
in change in supply chain strategy

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National Institute of Technology Calicut Department of Mechanical Engineering
EXPANDING STRATEGIC SCOPE
 Scope of strategic fit refers to the function and stages that devices an integrated strategy
with a shared objective
 One extreme - operation within a function devices independent strategy
 Other extreme - all functional areas within all stages of the supply chain device strategy
jointly with a common objective
Intracompany intraoperation scope: minimises local cost view
 Strategic fit is considered in one operation within a functional area within a company
 Resulting collection of strategies will most likely not come close to maximising supply
chain profit – conflicting local objectives
 Practices during 1950s and 1960s
Intracompany intrafunctional scope: minimise functional cost view
 Given that many operations together form each function within a firm, managers
recognised the weakness of the intracompany intraoperation scope
 With the intracompany intrafunction scope, the strategic fit is expanded to include all
operations within a function
 The scope of strategic fit expands to an entire function within a stage of the supply chain

Suppliers Manufacturer Distributor Retailer Customer

Competitive
Strategy

Product
Development
Strategy
Supply Chain
Strategy

Marketing
Strategy

An example of intracompany intraoperation scope of supply chain strategy at a

distributor
 An example of intracompany intrafunctional scope of supply chain strategy at a
distributor

Intracompany interfunctional scope: maximise company profit view

 Different functions may have conflicting objectives
 Functional strategies are developed to support both each other and the competitive
strategy
Intercompany interfunctional scope: maximise supply chain surplus view
 Intracompany interfunctional scope leads to each stage of the supply chain trying to
maximise its own profits, which does not necessarily result in the maximisation of supply
chain surplus
 When company uses speed as their primary competitive advantage to succeed in the
marketplace, intracompany interfunctional strategy performs badly
 The impediment to create level of speed that customers are demanding lies to a
degree within their own boundaries
 Managing these interfaces becomes a key to providing speed to customers
 Intercompany scope forces every stage of the supply chain to look across the supply chain
and evaluate the impact of its action on other stages as well as on the interfaces
 This means treating stages in the supply chain that a company does not own as belonging
to the company
 Suppliers Manufacture Distributor Retailer Customer
r
Competitive interfunctional scope of supply chain
Strategy strategic fit at a distributor

Product
Development
Strategy Agile intercompany interfunctional scope

Supply Chain  Till now the discussion was on

Strategy strategic fit under static context –
players in supply chain and customers
do not change over time
Marketing  Dynamics exits – product life cycle get
Strategy shorter and companies try to satisfy the
changing needs of individual
customers
 In such situations, a company may
have to partner with many different
firms depending on the product being
produced and the customer being
served – strategic fit should have agile
intercompany scope