1

Unit 1
Introduction to supply chain management

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2 What is supply chain?
 All parties involved, directly or
indirectly, in fulfilling a customer
request.
 Includes vendors, manufacturer,
transporter, warehouses, distribution
channel.
 Supply chain is dynamic and
involves constant flow of
information, product and funds
between different entities.
 Supply chains can be visualized in
two parts- upstream and
downstream that is differentiated by
focal firm.
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3 What is supply chain
management?
 Supply Chain Management means
managing flow of goods and services &
information through supply chain to make
organization more responsive to customer
needs with effective management of funds
flow and lowering total cost.

 Effective SCM requires information,

communication, co-operation and trust.

 Some companies attempt to manage their

supply chain by vertical integration.

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4 Objectives of supply chain

 Meet the customer requirements in terms of value

 Increase firm profitability

 Increase competitiveness of the firm

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5 Evolution of supply chain management

THE FIRST REVOLUTION (1910- THE SECOND REVOLUTION THE THIRD REVOLUTION (1995-
1920)-FORD SUPPLY CHAIN (1960-1970)-THE TOYOTA 2000)-THE DELL SUPPLY CHAIN
SUPPLY CHAIN

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6 Supply chain macro processes

 Vendor relationship management

 Internal supply chain management

 Channel management

 Customer relationship management

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7 Core areas of supply chain
management
 Supply chain design (location & capacity of facility, mode of transport,
distribution network, IT infrastructure)

 Supply chain planning (inventory planning, production planning, market

promotions, weekly forecast, DRP)

 Supply chain operations (procurement, production, quality control, order

processing, inventory management, order filling, shipping, feedback)

 Supply chain performance management

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8 Historical perspective

 Almost 70 years back, supply chain management was based on three

streams.
1. sourcing, procurement and supply management
2. Materials management
3. Logistics and distribution.

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9 Supply chain and value chain

 Are supply chain and value chain same?

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10 Supply chain and financial
performance
 Supply chain has impact on inventory and capital
 Supply chain has impact on order to cash cycle
 Supply chain has impact on ROA (Return on Assets)
 Supply chain has impact on balance sheet of the firm

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11 Major challenges in supply chain
management
 Supply chain design
 Distribution strategy
 Dealing with trade-offs
 Information management
 Inventory management
 Cash flow management

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Why
12 supply chain management
holds such significance?
Following are the major trends that have make supply
chain more important:

 Extension of product line (creating excess inventory

at all level)
 Shorter product life cycle
 Higher level of outsourcing
 Shift in power structure in the chain
 Globalization of manufacturing

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13 Supply chain decisions

 Supply chain management decisions are often said to belong to one of

three levels; the strategic, the tactical, or the operational level

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14 Enablers of supply chain performance

 Three major enablers that have helped firms and nations in reducing supply
chain costs are:

 Improvement in communication and IT

 Entry of third-party logistics providers
 Enhanced inter-firm coordination capabilities

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15 Supply chain performance in India

 High logistics cost

 Inefficiency of transportation and warehouse sector
 Moderate inventory turnover
 Demand distortion
 Revenue management problems

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16 Challenges in managing supply chain
in India
 Government policy drives location decision

 Poor state of logistics infrastructure

 Poor IT infrastructure

 Weaker conception of outsourcing logistics in business

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17 Supply chain vulnerability

 Supply-chain vulnerability can be described as the propensity of risk

sources and risk drivers to exceed risk-mitigating strategies, thereby leading
to unfavorable results and jeopardizing the supply chain’s ability to
productively serve the consumer.
 vulnerably as design and process factors that may increase the exposure to
different kind of internal or external risks in supply chain.
 If managers can assess their supply chain vulnerability, then better decisions
can be taken to make supply chains more robust.

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18 SCV drivers

 Supply chain structure vulnerability drivers:

 Number of nodes (no. of suppliers/internal customers-more numbers
increases complexity in supply chain)
 Nodes criticality (Supply base reduction has advantages such as increased
product quality but the firm lacks contingency suppliers in case of supply
disruption. Single sourcing occurs when there is extreme case of supplier
concentration)

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19 SCV drivers

 Organization complexity vulnerability drivers:

 Product complexity
 Process complexity
 SC relationship vulnerability drivers:
 Type of supply chain relationship
 Non-aligned Performance measurement matrix (choice of cost reduction,
revenue management, customer happiness)

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20 SCV drivers

 Information management vulnerability drivers:

 Information generation and visibility
 Detection and control mechanism

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21 Strategic fit

 Strategic fit means firm's competitive and supply chain strategies have
aligned goals.

 Consistency between customers priorities that competitive strategies hopes

to satisfy and supply chain capabilities.

 All processes of value chain contribute to success or failure of a firm.

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22 How to achieve strategic fit

 Understanding the customer uncertainty (arise because of varied need

with respect to quantity, price, lead time, rate of innovation. Service
levels) and supply chain uncertainty (arise because of frequent
breakdown, low yields, poor quality, limited capacity, evolving process)
 Understanding supply chain capabilities (response to wide need, meet
short lead times, handle a large variety, build innovative products, meet
service levels)

 Achieving strategic fit (achieving efficiency for certain demand and

responsiveness for uncertain demand)

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23 Finding zone of strategic fit

Responsive
SC

Efficient SC

Certain Uncertain demand

demand

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24 Comparison of efficient and responsive
supply chain
Efficient supply chain Responsive supply chain
Primary goal Cost minimization Respond quickly
Pricing strategy Low margin as price is a Higher margin
customer driver
Manufacturing strategy Lower cost through high Maintain capacity
utilization flexibility against
demand uncertainty
Inventory strategy Minimize inventory Maintain buffer to deal
uncertainty
Lead time strategy Reduce but not at the Reduce aggressively
expense of cost
Supplier strategy Select based on cost Select based on speed,
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and quality flexibility, reliability and
quality
25 Issues affecting strategic fit

 Demand distortion
 Multiple product and customer segment
 Government policy
 Product life cycle
 Globalization and competitive changes over time
 The environment and sustainability
 Political scenario

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Impellers
26 of
supply chain
 The empowered customer
 Developments in IT tools
 Globalization
 Supply chain concepts
(system concept, total cost
concept, trade-off concepts)

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27 Drivers of supply chain performance

 Facilities
 Information
 Inventory
 Transportation
 Pricing
 Sourcing

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28 Components of facilities decisions

 Role (flexible or dedicated-plants, cross dock facility or storage facility-WH)

 Location
 Capacity
 Facility related matrix (utilization, product cost per unit, processing/idle/set
up time)
 Overall trade-off: Responsiveness vs. Efficiency
 Increasing the number of facilities increases facility and inventory cost but
decreases transportation costs and reduces response time. Increasing
flexibility or capacity of facility increases facility cost but decreases
inventory cost and response time.

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29 Inventory

 Role in supply chain (works as cushion for contingency, major source of cost
and a huge impactor on responsiveness, helps in achieving competitive
goals)
 Inventory in supply chain (cycle inventory, safety inventory, seasonal
inventory, in-transit inventory, pipeline inventory)
 Inventory related matrix ( cash-to-cash cycle time, inventory turnover ratio,
order fill rate)
 Trade-offs in inventory decision
 Increasing inventory makes supply chain more responsive and benefits in
production and logistics due to economies of scale, however, increasing
inventory results in higher holding costs.

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30 Transportation

 Role in supply chain (acts as a life blood for supply chains, has impact on
SC costs and responsiveness)
 Design of transportation network (transportation mode, locations, routes,
consolidations or end-to-end deliveries)
 Transportation related matrix (average inbound transportation cost,
average shipment size, average outbound transportation cost)
 Overall trade-off:
 The fundamental trade-off is between transportation cost (efficiency) and
the speed (responsiveness). Using fast mode of transport raises
responsiveness and transportation cost but lowers the inventory holding
cost.

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31 Information

 Role of information (deeply affects every part of supply chain, helps in

making firm both efficient and responsive)
 Components of information decision (coordination and information sharing,
forecasting and aggregate planning, enabling technologies-EDI, ERP, RFID
etc.)
 Information related matrix (forecast horizon, forecast error, variance from
plan)
 Overall trade-off: complexity vs. Value
 As more information is shared across supply chain the complexity and cost
of both required infrastructure and follow up analysis increases.

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32 Pricing
 Role of pricing: pricing affects customer segments as well as customer's
expectations. Pricing in supply chain can be used as an effective tool to
match supply and demand.
 Components of pricing: pricing and economies of scale, everyday low
pricing and high-low pricing, fixed price vs. Menu pricing
 Pricing related matrix: profit margin, days sales outstanding, average order
size, range of periodic sales
 Overall trade-off: increase firm profits
 Understand cost structure of performing a supply chain activity and the
value this activity offers to supply chain. For ex. Everyday low pricing will
create stable demand and allows for efficiency.

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33 Sourcing

 Components of sourcing (in-house or outsource, supplier selection,

procurement)
 Sourcing related matrix (average purchase price, days payable
outstanding, fraction of on time deliveries, supplier reliability)
 Overall trade-off: increase the supply chain surplus

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34 Designing distribution network

 Distribution network performance is evaluated along

two dimensions at the highest level:
 Customer needs that are met
 Cost of meeting customer needs
 Distribution network design options must be compared
according to their impact on customer service and the
cost to provide this level of service

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35 Impact of Distribution Network Design
 Elements of customer service influenced by network
structure:
 Response time
 Product availability
 Customer experience
 Order visibility
 Supply chain costs affected by network structure:
 Inventories
 Transportation
 Facilities and handling
 Information
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36 Service rate and number of facilities

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37 Inventory cost and number of facilities

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38 Facilities cost and number of facilities

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39 Variation in Logistics Costs and Response
Time with Number of Facilities

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40 Design Options for a Distribution
Network
 Manufacturer Storage with Direct Shipping
 Manufacturer Storage with Direct Shipping and In-Transit
Merge
 Distributor Storage with Carrier Delivery
 Distributor Storage with Last Mile delivery
 Retail Storage with Consumer Pickup

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41 Manufacturer Storage with
Direct Shipping

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42 Performance characteristics for manufacture storage with
direct shipping

 Cost factor: higher transportation cost, lower facilities cost, significant

investment in information infrastructure to integrate manufacturer and
retailer.
 Service factor: longer response time, better product availability, good
customer experience, time to market the product is low, less order visibility,
product returns difficult and expensive.

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43 In-transit merge network

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44 Performance characteristics of in-
transit merge network
 Cost factor: lower transportation cost, higher facilities cost, higher
investment on information systems
 Service factor: higher response time, better customer experience because
single delivery to customer, order visibility will be still less.

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45 Distributor storage with carrier delivery

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46 Performance characteristics of
distributor storage with carrier delivery
 Cost factor: higher inventory cost, lower transportation cost, higher facilities
cost, higher information system cost
 Service factor: low response time, better customer experiences due to no
multiple deliveries, better order visibility, return management easier

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47 Distributor/Retail storage with last mile
delivery

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48 Performance characteristics of distributor/Retail
storage with last mile delivery

 Cost factor: higher inventory cost, due less economies of scale higher
transportation cost, higher facilities cost.
 Service factor: quick response, good customer experience, easy return
management

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49 Retail storage with customer pick-up

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50 Performance characteristics of Retail
storage with customer pick-up
 Cost factor: very high inventory cost, higher facilities cost, lower
transportation cost
 Service factor: immediate pick up possible for customers highest potential
to market the new product, better shopping experience for customers,
easy return management

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51 Supply chain network design decision

 Facilities role: What role should each facility play? What processes are
performed at each facility?
 Facility location: Where should facilities be located?
 Capacity allocation: how much capacity should be allocated to each
facility
 Market and supply allocation: what markets should each facility serve?
Which supply sources should feed each facility?

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52 Factors affecting network design
decision
 Strategic factors ( a blend of cost leadership and local presence)
 Investment on facilities
 Macroeconomic factor
 Political factors
 Infrastructure factors
 Competitive factors
 Socioeconomic factors
 Logistics and facilities cost

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53 Framework for network design decision

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54 Conventional network

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55 Tailored Network: Multi-Echelon
Finished Goods Network

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56 Network design decision in practice

 Do not underestimate life span of facilities

 Do not gloss over the cultural implications
 Do not ignore quality of life issues
 Focus on tariff and tax incentives when location facilities

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57 Risks that affect global supply chain
performance
Risk factors Percent of suppl chain
impacted
Performance of suppl chain partners 38
Volatility of fuel price 37
Natural disasters 35
Logistics inefficiency 33
Forecasting/planning accuracy 30
Currency fluctuations 29
Communication issues 27
Shortage of skilled resources 24
Port operations 23
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58 Supply chain performance dimension
with respect to off-shoring
Performance dimension Impact of offshoring
Order communication More difficult
Raw material cost Could go either way depending on
raw material sourcing
Unit cost May be lower but quality may suffer
Freight cost Higher
Lead time Longer
Inventory Increases
Product returns Increased return likely
Hidden cost Higher hidden cost

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59 Risk management in global supply
chains
Category Risk driver
Disruptions Natural disaster, war, terrorism, labour disputes, supplier
bankruptcy
Delays Inflexibility at source, poor quality at source
System risk Information infrastructure breakdown
Forecast risk Seasonality, short life cycle, product variety, information
distortion
IPR risk Vertical integration
Procurement risk Exchange rate risk, price of inputs
Receivable risk Number of customers, financial strength
Inventory risk Rate of product obsolescence, demand and supply
uncertainty
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60 Risk mitigation strategy
Risk mitigation strategy Tailored strategy
Increase capacity Focus on low-cost, build decentralized capacity for
predictable demand
Increase Favor cost for commodity product and
responsiveness responsiveness for short life cycle product
Increase inventory Decentralize inventory for predictable, lower
value product and centralize inventory for less
predictable higher value product
Increase flexibility Favor cost over flexibility for predictable high-volume
product and favor flexibility over cost for
unpredictable lower volume product
Increase source Prefer capability over cost for high value high risk
capacity product, favor cost over capability for low value
commodity product

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61 Flexibility in supply chain

 New product flexibility – ability to introduce new products at rapid rate.

 Mix flexibility – ability to produce variety of products within short period of time

 Volume flexibility – ability to operate profitably at different level of outputs

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62 Emerging trends in supply chain
management
 AI and ML are revolutionizing predictive analytics, making demand
forecasting more accurate than ever. By processing historical data market
trends, and various external factors, these technologies can anticipate
demand with remarkable accuracy. This leads to optimized inventory,
fewer stockouts, and minimized surplus inventory, ultimately improving
customer satisfaction and reducing operational costs.
 IoT devices, including smart sensors and RFID tags, are enhancing supply
chain visibility by providing real-time tracking of products from production
to delivery. This transparency across all stages enables businesses to identify
bottlenecks, reduce delays, and improve overall supply chain efficiency.
 Warehouses are becoming increasingly automated with AI-powered robots
and IoT devices. This automation results in faster order fulfillment, reduced
labor costs, and higher accuracy.

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63 Emerging trends in supply chain
management
 Combining blockchain technology with AI and IoT enhances the security
and transparency of supply chain transactions. Blockchain provides a
decentralized, secure ledger for all transactions, ensuring traceability,
reducing fraud risks, and building trust among supply chain partners.
 AI and ML are changing supplier relationship management by providing
deeper insights into supplier performance, risk factors, and opportunities for
collaboration.
 More focus on sustainability, customer-centric approach and
collaborations.

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64 Future of supply chain

 Realizing cost savings and optimizing working capital

 Rationalizing the supply base
 Improved risk prediction and management
 Achieving strategic fit
 Adoption of technology and automation across the value chain
 Handling changed market demographics
 Coping with trade policies

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65 Theory of Constraint in supply chain
 The Theory of Constraints (TOC) is a management philosophy that was
developed by Dr. Eliyahu Goldratt in the 1980s. The theory focuses on
identifying and managing the constraints that limit the performance of a
system, whether it’s a manufacturing process or a supply chain.
 TOC proposes that in any system, there is one constraint or bottleneck that
limits the system’s performance. This constraint is often referred to as the
“system’s bottleneck” and must be identified and managed to improve the
overall performance of the system.
 In supply chain, TOC can be applied to identify and manage the
constraints that limit the flow of materials and products through the supply
chain. For example, a supplier may have a long lead time that limits the
flow of materials to the manufacturing facility, or a warehouse may have
limited storage capacity that limits the flow of products to customers.

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66 Implementing theory of constraint in
supply chain
 Identify the constraint
 Exploit the constraint
 Subordinate the other processes to the constraint
 Elevate the constraint
 Repeat the process

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67 Benefits of implementing TOC in supply
chain management
 Increased throughput
 Reduced inventory
 Improved profitability
 Enhanced decision making
 Continuous improvement

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68 Time value of money in supply chain

 Supply chain design decisions should be based on time value of money.

 Discounted cash flow techniques incorporates that 'a money today is worth
more than a money tomorrow'.
 Present value of future income is the discounted value of future income
and is equal to net present value
 NPV = GPV – I , where GPV is Gross Present Value of future cash inflow, and
I is initial investment (cash outflow)
 NPV of different options should be compared when making supply chain
decision.
 A negative NPV of an option indicates the option will earn your loss.

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69 Customer Segmentation in Supply
Chain
 Traditionally companies divided its internal customer on the bases of
class of trade or volume of trade
 (for ex. Consumer goods industry group, customers according to
grocery or drug, customer with high business volume and low
business volume)
 But now a days this difference between customers has become
blurred, so it is becoming difficult to differentiate customer and
understanding their requirements.
 Now companies are finding more useful approaches to group their
customers
 One of the grouping is called account segmentation.

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70 Account segmentation

 One of the example of account segmentation is done

as follows:
 Customers with operating sophistication
 Customer with merchandising philosophies
 Operating sophistication is determined by the degree of
development of their information system and operating
methods.
 Merchandising philosophies include sales approaches
for ex. Everyday low prices, deal oriented schemes
(heavy emphasis on discounting and promotions)

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71 Account segmentation

 Analyzing customer according to these characteristics

help to identify segments.
 The customer service requirements and demand for
logistic services differ for each of the segments.
 For ex. Retailers have different strategies and they
demand different things from their suppliers (small lot
frequent shipments)
 Companies will be most successful if they recognize
these important operation differences and service
requirements among their various customer segments
and orient their capabilities towards the need of them.

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72 Customer centric supply chains

 Many companies, still operate without clear statement

of mission and with performance targets for their logistic
functions.
 This leads to job complexities, conflicts and confusion
 Without goals and performance standard, supply chain
of a firm may become vulnerable

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73 How to be customer centric?

 Companies need to build Leading-edge systems, for this five areas

must be addressed:
 Understanding customer service needs
 Which customer service elements are important to customers?
 How are we performing on each element of service-from our
customer perspective?
 What value added capabilities can give us a distinctive edge?
 A redesign of logistics network

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74 Bull-whip effect

 The objective of supply chain management is to provide a high velocity

flow of high quality, relevant information that will enable suppliers to
provide an uninterrupted and precisely timed flow of materials to
customers
 However, unplanned demand forecasting, including those caused by stock
outs, create distortions which can create havoc up and down the supply
chain
 The most common general drivers of these demand distortions are:
 Customers (Internal & External)
 Promotions
 Production Policies
 Systems
 Suppliers

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75 Bull-whip effect

 The essence of the bullwhip effect is that orders to suppliers tend to have
larger variance than the probable demand.
 The more chains in the supply chain the more complex this issue becomes
 Proctor & Gamble coined the term “bullwhip effect” by studying the
demand fluctuations for Pampers (disposable diapers)

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76 Causes of bull-whip effect

 Perceived risk of channel players

 Panic ordering reactions after unmet demand
 Forecast errors
 Demand Dependent processes
 Quantity discounts
 Trade promotion and forward buying
 Chase production strategy

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77 Cracking the bull-whip effect

 Minimize the cycle time between projected and actual demand

information
 Establish the monitoring of actual demand
 Understand product demand patterns at each stage of supply chain
throughout the year
 Increase the frequency and quality of collaboration through shared
demand information
 Avoid surprise incentives for customers that directly cause demand
accumulation
 Offer your products at consistently good prices to minimize buying surges
brought on by temporary promotional discounts
 Identify, and preferably, eliminate the cause of customer order reductions
or cancellations

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78 Methods to reduce uncertainty in
supply chain
 Vendor Managed Inventory (VMI)
 Just In Time replenishment (JIT)
 Strategic partnership
 Information sharing
 Eliminate everyday low-price policy
 Eliminate order allocation based on past sales

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