LECTURE 3: INTRODUCTION TO SUPPLY CHAIN MANAGEMENT

What is a supply chain? Why is it important? Why manage it?

→ Supply chain = a network of interrelated facilities & activities that
create & deliver products & services to end customers; network of
manufacturing & service operations that supply one another
− Flow of materials, money, & information
− From raw materials through manufacturing to the end
consumer
− Links operations across organizations
− Facilities = warehouses, factories, processing centers, offices,
distribution centers, & retail outlets
− Functions & activities = forecasting, purchasing, inventory
management, information management, quality assurance,
scheduling, production, distribution, delivery, customer
service
→ Questions of liability & the need for companies to take
responsibility for monitoring the safety of outsourced goods

→ Supply chain encompasses all activities associated w/ the

upstream and downstream flow & transformation of goods & info
from the raw materials stage (extraction) through to the end user
→ Technology, specialized expert knowledge, instant communication,
and cheaper transportation foster specialization & worldwide supply
chains
− Expertise adds value at each step
− Collaboration enables high levels of customer satisfaction &
efficiency
→ Network of mftg & service ops that supply one another
− From raw materials through mftg to the end consumer
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 − Flows of materials, money, & info − Supply chain functioning benefits from mutual trust,
− Link operations across organization information sharing, and collaborative forecasting and
→ Supply chains are both external & internal to the organization planning
− External = provide raw materials, parts, equipment, supplies,
and/or other inputs to the org, and they delivery outputs that
are goods to the org’s customers
− Internal = part of ops function itself, supplying ops w/ parts &
materials, performing work on products, and/or performing
services
→ The “chain” in supply chain emphasizes the interconnectedness of
the different elements: each link is a customer of the previous
element, and the supplier of the following link

SUPPLY CHAIN MANAGEMENT

= an integrating philosophy to manage the total flow of a distribution
channel from supplier to ultimate customer
− A systems approach to managing the entire flow of info, The Need to Manage the Supply Chain
materials, & services from raw materials suppliers through → To address problems related to large oscillations of inventories,
factories & warehouses to the end customer inventory stockouts, late deliveries, & quality problems
− Addresses problems related to large oscillations of → Most organizations do little to manage their supply chains
inventories, inventory stockouts, late deliveries, & quality − They tend to concentrate on their own operations and on
problems their immediate suppliers
→ Objectives − Planning, marketing, production, & inventory management
− Maximize profit & customer satisfaction functions in organizations & in supply chains have often
− Minimize costs operated independently of each other
− Maximize benefits to stakeholders

Goal of SCM
− Match supply and demand as effectively and efficiently as
possible
− Cooperation and collaboration among supply chain partners is
very important
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 Bullwhip Effect - Lead time variability (forecast error during
→ Increasing swings in inventory in response to shifts in customer replenishment lead time)
demand as one moves further up the supply chain - Lot-sizing/order synchronization
→ Phenomenon of variability magnification from the customer to the - Trade promotion and forward buying
producer in the supply chain → indicates a lack of synchronization - Anticipation of shortages
among supply chain members
− Retailer’s orders to the wholesaler display greater variability
than the end-consumer sales
− Wholesaler’s orders to the manufacturer show even more
oscillations
− Manufacturer’s orders to its suppliers are the most volatile
→ Even a slight change in consumer sales ripples backward in the
form of magnified oscillations upstream (resembling the result of a
flick of a bullwhip handle)
→ Supply patterns do not match the demand patterns → inventory
accumulates at various stages, and shortages and delays occur at
others
ELEMENTS OF SCM
− Disorganization
→ SCM involves coordinating activities across the supply chain.
− Lack of communication
→ Some OM activities that must be taken into account:
− Free return policies
− Order batching
− Price variations
− Demand information
− Behavioral
- Misuse of base-stock policies
- Mis-perceptions of feedback and time delays
- Panic ordering reactions after unmet demand
- Perceived risk of other players' bounded rationality
− Operational
- Forecast errors
- Adjustment of inventory control parameters with each
demand observation
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 SUPPLY CHAIN STRATEGY Functional vs Innovative Products
→ IDEALLY, the supply chain partners and the firm should be working FUNCTIONAL (downstream) INNOVATIVE (upstream)
toward the same mission and objectives in order to have a consistent → Satisfy basic needs w/c don’t → Customers pay a premium for
supply chain strategy change much over time these
− BUT since no single firm controls the entire supply chain, a − Include staples that − Enable a company to
coherent supply chain strategy can be difficult to achieve people buy from a wide achieve higher profit
− Must take into account not only the operations strategy of the range of retail outlets margins
(grocery stores, gas − Imitators quickly erode
firm but also the strategies and capabilities of the suppliers
stations) the margins, so firms are
and customers in the firm’s supply chain
forced to introduce a
− Supply chain partners that are working toward differing goals steady stream of
will not be competitive with other supply chains that have innovations
achieved a high degree of cooperation and consistency → Have stable, predictable → Typically have a life cycle of
demand & long life cycles just a few months + demand is
FUNCTIONS OF THE SUPPLY CHAIN − Low market mediation unpredictable
1. Physical function costs − Short life cycles & the
− Includes converting raw materials into parts, components, and − Stability invites great variety typical of
eventually finished goods, and then transporting all of them competition, w/c often these products further
from one point in the supply chain to the next leads to low profit increase unpredictability
− Related costs include production, transportation, and margins
→ Focus on physical costs → Suppliers should be chosen
inventory shortage
for their speed & flexibility, not
2. Market mediation function
for their low cost
− Ensures that the variety of products reaching the marketplace → Important info flow is the → The crucial flow of info
matches what consumers want to buy one that occurs w/in the chain occurs not only w/in the chain
− Related costs include: as suppliers, manufacturers, and but also from the marketplace
o Supply exceeding demand → a product has to be retailers coordinate their to the chain
marked down & sold at a loss activities in order to meet − Important decisions
o Supply falls short of demand → lost sales opportunities predictable demand at the about where in the chain
& dissatisfied customers lowest cost to position inventory &
available production
capacity in order to
hedge against uncertain
demand

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 TYPES OF SUPPLY CHAINS: Efficient (maximized prod. capacity)
vs. Responsive Supply Chains (buffers, avoids stockouts)
PHYSICALLY EFFICIENT MARKET-RESPONSIVE
SUPPLY CHAIN SUPPLY CHAIN
Supply predictable Respond quickly to
demand unpredictable demand
Primary → efficiently at lowest → to minimize
purpose possible cost stockouts, forced
markdowns, and
obsolete inventory
Manufacturing Maintain high average Deploy excess buffer
focus utilization rate capacity
1. Functional product w/ efficient supply chain
Generate high Deploy significant
Inventory turnovers & minimize buffer stocks of parts or − 2 dimensions of efficiency
strategy inventory throughout finished goods o Cost coordination
the chain o Info coordination
Shorten lead time as Invest aggressively in − Can be gained by productivity improvements, w/c in turn are
Lead-time
long as it doesn’t ways to reduce lead the result of basic elements of manufacturing excellence such
focus
increase cost time as JIT, automation, economies of scale, facility layout, &
Approach to Select primarily for cost Select primarily for workflow streamlining & highly effective logistics system
choosing and quality speed, flexibility, and 2. Innovative products w/ responsive supply chain
suppliers quality − Can make use of the concept of postponement to pursue
Maximize performance Use modular design to aggressive build-to-order strategies
Product-
& minimize cost postpone product
design − Utilize a supplier hub, often close to the final assembly site, to
differentiation for as
strategy ensure a stable & reliable supply of components
long as possible
− Internet enables companies to tap in to a bigger supply base
to ensure reliable supply of the products so as to be
responsive

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 THREE PILLARS OF SCM 3. SUPPLY MANAGEMENT
MAIN (actual slide content):
1. DEMAND MANAGEMENT → Responsible for obtaining the materials, parts, supplies, & services
MAIN (actual slide content): needed to produce a product or provide a service
→ estimate, control, smooth, coordinate, balance, & influence the → Identifying sources of supply, negotiating contracts, maintaining a
demand & supply for a firm’s products & services to reduce total database of suppliers, obtaining goods & services that meet/exceed
costs for the firm and its supply chain ops reqs in a timely & cost-efficient manner, managing suppliers
→ Accepts forecasts from other functions & updates them on the Additional info (slide notes):
basis of actual, real-time demand − Match the needs of the org to what the supply market can
→ Works w/ supply side to adjust the inflow of materials & products provide + develop the supply market to meet the needs of the
Additional info (slide notes): org
− Involves forecasting, customer order processing, making customer − Influencing & negotiating, building relationships w/ key
commitments, and interfacing between the marketplace & stakeholders & suppliers
manufacturing − Interface bet. the org & the supply market
− Info is utilized in planning processes to position SC resources like − Involves the generation of reqs, sourcing, pricing, developing
inventory & capacity in a timely & cost-effective manner an enforceable agreement, & the post-award managing of the
− Responsible for creating a smooth master production sched & for relationship
smoothing production after scheds have been released to internal − Strategic sourcing represents increasing responsibility for
production & external suppliers supply management
− Periodic analysis of an org’s spending (what’s purchased &
2. LOGISTICS MANAGEMENT from whom)
MAIN (actual slide content): − Analysis of the supply market (who offers what, and what
→ deals w/ handling, movement, & storage activities w/in the supply changes are taking place in the relevant component of the
chain, beginning w/ suppliers & ending w/ the customers supply world)
→ Responsible for site location analysis, returned goods handling, − Dev’t of a sourcing strategy w/c supports the corporate
parts & service support, field service & maintenance, & salvage & strategy while minimizing risks & costs
scrap disposal − Supplier mgmt. = choosing partners, supplier audits,
Additional info (slide notes): certification, relationship mgmt., partnership, strategic
− Includes traffic & transportation, warehousing & storage, partnering
industrial packaging, materials handling, inventory control,
order fulfillment, & demand forecasting

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 DEMAND MANAGEMENT INFORMATION FLOW MOVEMENTS W/IN & OUTSIDE A FACILITY
→ A collaborative process that involves accurately determining how
much product needs to be produced at each level of the supply chain
through the end consumer

INTERFACES OF SUPPLY MGMT FUNCTION

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 Evolution of SCM 4. Strategic
→ Successful firms must know where they are in relation to where − Fully integrated supply & planning strategies, internal &
they want to be external material capacity requirements planned &
− Benchmarking best-in-class practices & developing metrics coordinated
enable firms to establish a baseline of where they are, develop − Cross-functional teams, typically organized around product
an appropriate action plan, and then track their progress families, involve both customers & suppliers
toward strategic supply management − “extended enterprise” orientation
→ CLERICAL → MECHANICAL → PROACTIVE → STRATEGIC − Demand, supply, & logistics managers report to SCM
1. Clerical − Virtually defect-free materials & services
− Emphasis → convenience − High-tech supply chain IT, leverage supplier tech
− Relationship w/ suppliers → adversarial
− Lack of collab among supply chain members SUPPLY CHAIN PERFORMANCE MEASURES
− Reactive → focus is on current planning & replenishment → Links of operational measures to financials
period
− Reporting → very low-level
− Data → historical (if available)
2. Mechanical
− Transactional focus
− Historical demand & stockouts drive replenishment
− “nervous” planning (bullwhip effect)
− Inventory mgmt. at product/component level
− Relationship w/ suppliers still adversarial
− Data still mainly historical
3. Proactive
→ Efficiency of the supply chain = can be measured based on the size
− Cross-functional team orientation
of the inventory investment in the supply chain
− Emphasis → balance bet. schedule attainment, customer 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑
satisfaction, inventory risk, & investment Inventory Turnover =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑎𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑒 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑣𝑎𝑙𝑢𝑒
− Data are centralized & available thru a data accumulation & 𝐴𝑣𝑔. 𝑎𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑒 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑣𝑎𝑙𝑢𝑒
delivery system Weeks of supply = 𝑥 52 𝑤𝑘𝑠
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑
− Coordinated procurement system 𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑣𝑡𝑦 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
− Dev’t of suppliers w/ long-term contracts Percentage invested in invty = 𝑥 100%
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
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→ SCOR model (Supply Chain Ops. Reference) = set of processes, → Reasons to outsource
metrics, & best practices developed by APICS Supply Chain Council 1. Organizationally driven
− Enhance effectiveness → focus on what you do best
− Increase flexibility to meet changing biz conditions,
demand for products & services, & technologies
− Increase product & service value, customer satisfaction, &
shareholder value
− Give employees a stronger career path
2. Improvement-driven
− Improve operating performance
o Improve quality & productivity, shorten cycle times
− Obtain expertise, skills, & tech that aren’t otherwise
available, including new ideas
− Improve mgmt. & control
OUTSOURCING
− Improve credibility & image
→ Transferring activities that have been traditionally internal to an
o Important in relationship w/ superior providers
external supplier
3. Financially driven
− Non-core activities (w/c can be a sizeable portion of an org’s
− Reduce inv. in assets & free these up for other purposes
total biz) are good candidates for outsourcing
− Generate cash → transfer assets to providers
→ Implies an agreement (typically a legally binding contract) w/ an
4. Cost-driven
external org
− Reduce costs → superior provider performance & the
− Based on the classic make-or-buy decision, concerning w/c
provider’s lower cost structure
products to make and w/c to buy
− Turn fixed costs into variable costs
− Outsourcing mftg is an extension of the long-standing practice
5. Revenue-driven
of subcontracting production activities, w/c when done on a
− Gain mkt access & biz opportunities via provider’s network
continuing basis is known as contract manufacturing
→ Accelerates due to the combination of 3 factors that contribute to − Accelerate expansion → tap provider’s capacity,
both lower cost & more specialization processes, & systems
− Increased technological expertise − Expand sales & production capacity during periods when
such expansion can’t be financed
− More reliable & cheaper transportation
*Ask “Does this biz aspect have to become part of my core
− Rapid dev’t & deployment of advancements in
competency?” and NOT “Is this one of my core competencies now?”
telecommunications & computers
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 substandard quality, eqpt breakdown, canceled/changed
→ Upsides & downsides of outsourcing orders)

*OTHER NOTES:
→ Supply chains are complex & dynamic
→ SCM is harder to manage b/c many external
companies/entities are involved, and these companies seek to
optimize only their own operations
→Biggest disadvantages: loss of knowledge & possible leakage
→ SCM components = materials & services, information, funds
→ Upstream = to suppliers
ISSUES & CHALLENGES IN SCM
→ Downstream = to customers
1. Need to improve operations
− Opportunity to cut cost & reduce time, & improve productivity
& quality (depends on procurement, distribution, & logistics)
2. Increasing levels of outsourcing
− Significant amount of the cost & time spent on supply-related
activities (wrapping, packaging, moving, loading & unloading,
and sorting) & other related activities may be unnecessary
3. Increasing transportation costs (need to be managed)
4. Need to manage inventory
− Shortages can severely disrupt work flow & have far-reaching
impact, while excess inventory adds unnecessary costs
5. Competitive pressures
− Increasing no. of new products; shorter product dev’t & life
cycles; increased demand for customization
− Adopt quick-response strategies & efforts to reduce lead times
6. Increasing importance of e-business
− New dimensions of biz buy & sell present new challenges
7. Complexity of supply chains
− Susceptible to uncertainties that can adversely affect its
performance (inaccurate forecasts, late deliveries,

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