SUPPLY CHAIN MANAGEMENT - 18ME653

Module -1: Introduction

Definition:
A supply chain consists of all parties involved, directly or indirectly, in fulfilling a customer request.
The supply chain encompasses all activities involved in the transformation of goods from the raw
material stage to the final stage, when the goods and services reach the end customer.

The supply chain includes not only the manufacturer and suppliers, but also transporters,
warehouses, retailers, and even customers themselves.

Supply chain Example (Detergent):

Supply chain stages include: Customers, Retailers, Wholesalers/distributors, Manufacturers,

Component/raw material suppliers.

Supply chain is dynamic and involves the constant flow of information, product, and funds between
different stages.

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Supply chain management (Supply chain network)::
Definition:
It is a branch of management which deals with the flow of goods and services.

Supply chain management involves planning, design and control of flow of material, information and
finance along the supply chain to deliver superior value to the end customer in an effective and efficient
manner.

This includes all processes that change raw materials into final products.

Example of supply chain management (Supply chain network):

Finance flow

The supply chain not only includes manufacturers, suppliers and distributors but also
transporters, warehouses and customers themselves. In reality, as seen in Fig, multiple entities are
involved at each stage: a manufacturer receives material from several suppliers and, in turn, distributes
the products through multiple distributors

The customer is interested only in the price, availability and quality of the product at the
neighbourhood retail outlet, where they actually come into contact with products supplied by
Hindustan Unilever (HUL) and Procter & Gamble (P&G) . If customers observe inefficiency on
account of non-availability, damaged packaging, etc. at the retail end with regard to HUL’s products,
they attribute inefficiency to HUL.

The customer is only interested in getting the desired product at the right place, at the right
time and at the right price. For a simple product like soap, the HUL supply chain involves ingredient
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suppliers, transporters, the company’s manufacturing plants, carrying and forwarding agents,
wholesalers, distributors and retailers. Obviously, HUL does not own all these entities, but the HUL
brand name is at stake and it has to be ensured that the entire chain delivers value to the end customer.
HUL cannot afford to focus only on those parts of the chain that are owned by it and ignore the other
parts of chain. Firms need to realize that the performance of the chain is determined by its weakest
link.

Supply Chain Management-Advantages

1. Develops better customer relationships and service.
2. Creates better delivery mechanisms for products and services in demand with minimum delay
3. Improves productivity and business functions.
4. Minimizes warehouse and transportation cost
5. Minimize direct and indirect costs.
6. Assist in achieving shipping the right product to the right place at the right time.
7. Enhance inventory management supporting the successful execution of Just in Time stock
models.
8. Assist companies in adapting to the challenges of globalization
9. Assist companies in minimizing waste and achieving efficiencies throughout the supply
chain process

Supply Chain – Objectives (or) Goals

1. Supply chain partners work collaboratively at different levels to maximize overall value
generated which is strongly correlated to supply chain profitability(maximize)

2. To construct standardized process, removes duplicate efforts and minimize inventory levels.

3. To minimization of supply chain expenses is very essential.

4. Cost efficient and cheap products are necessary, but supply chain managers need to concentrate
on value creation for their customers.

5. Exceeding the customers’ expectations on a regular basis is the best way to satisfy them.

6. Increased expectations of clients for higher product variety, customized goods, off season
available of inventory and rapid fulfilment at a cost comparable to in-store offering should be
matched.

7. To meet consumer expectations merchants need to leverage inventory as a shared resource

and utilize the distributed order Management Technology to complete orders from the
optimal node in the supply chain
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 Fundamentals of supply chain

Finance flow

The supply chain includes all functions involved in receiving and filling a customer request.
These functions include, marketing, operations, distribution, finance, and customer service.

The supply chain includes not only the manufacturer and suppliers, but also transporters,
warehouses, retailers, and even customers themselves.

Multiple entities are involved at each stage: a manufacturer receives material from several
suppliers and, in turn, distributes the products through multiple distributors.

Supply chain management, represents the confluence of at least three main streams of
knowledge and practical experience.

The three principal streams are:

 Sourcing, procurement, and supply management

 Materials management

 Logistics and distribution

The fusion of these streams into one powerful movement, supply chain management, which is
sweeping across the present-day industrial world.

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 Evolution -Supply Chain Management
The evolution of supply chain management has been a gradual process. Over the last century, there
have been three major revolutions in the field of Supply Chain Management:

1. The First Revolution (1910–1920): Vertical Integrated Firms Offering Low Variety of
Products.
The first major revolution was staged by the Ford Motor Company where they had managed to
build a tightly integrated chain. The Ford Motor Company owned every part of the chain - right from
the timber to the rails. Through its tightly integrated chain, it could manage the journey from the iron
ore mine to the finished automobile in 81 hours.

Ford innovated and managed to build a highly efficient, but inflexible supply chain that could
not handle a wide product variety and was not sustainable in the long run.

Till the second supply chain revolution, all the automobile firms were integrated firms. Even
traditional firms in India, like Hindustan Motors, were highly integrated firms where the bulk of the
manufacturing was done in-house.

2. The Second Revolution (1960–1970): Tightly Integrated Supply Chains Offering Wide
Variety of Products.
Towards the end of the first revolution, the manufacturing industry saw many changes,
including a trend towards a wide product variety. To deal with these changes, firms had to restructure
their supply chains to be flexible and efficient. The supply chains were required to deal with a wider
product variety without holding too much inventory.

The Toyota Motor Company successfully addressed all these concerns, thereby ushering in the
second revolution. The Toyota Motor Company came up with ideas that allowed the final assembly
and manufacturing of key components to be done in-house. The bulk of the components was sourced
from a large number of suppliers. The Toyota Motor Company had long-term relationships with all
the suppliers. These suppliers were located very close to the Toyota assembly plants.

Consequently, set-up times, which traditionally used to take a couple of hours, were reduced
to a couple of minutes. This combination of low set-up times and long-term relationships with suppliers
was the key feature that propelled the second revolution. The principles followed by Toyota are more
popularly known as lean production systems.

3. The Third Revolution (1995–2020): Virtually Integrated Global Supply Networks

Offering Customized Products and Services.
Technology, especially information technology, which is evolving faster is the fuel for the third
revolution in supply chain. We can understand the key characteristics of the third revolution using the
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example of Dell computers (Customized product), Apple Inc.(Revolutionized used experience) and
Bharti Airtel(strategic outsourcing and partnerships with global partners for core activities). The first
is a product company, the second combines product and service, and third is a pure service
organization. In each of these organisations, we can see different aspects of the third revolution.

Dell computers allows customers to configure their own laptops (in terms of processors, video
cards, screen sizes, memory, etc.) and track the same in their production and distribution systems.

Apple offers personal digital devices to its customers and iPod is a classic example. However,
it is not just about the product. Apple allows the consumer to have a personalized user experience
through the features and services.

Bharti Airtel allows services like My Airtel through which customer can have unique
personalized experience

Role in Economy
The growth of global supply chains has changed the distribution of incomes across countries.
Participation in these supply chains contributed to industrialization and high rates of economic growth
in several Asian developing economies. Manufacturing managers decide where to locate the company
based on the costs of production. That's led to a lot of jobs outsourcing in technology to India and
China. Many call - centers have outsourced to India and the Philippines.

Natural disasters are becoming an increasing threat that can disrupt any part of the supply chain.
The United Nations Refugee Agency reported their frequency has doubled in the last 20 years due to
global warming. If a disaster is bad enough, it can slow global growth.

In 2011, Japan's earthquake and the resultant tsunami created the most damage to the world's
supply of automobiles, electronics, and semiconductor equipment. The wings, landing gears, and other
major airline parts are also made in Japan, so the quake disrupted the production of Boeing's 787
Dreamliner. U.S. gross domestic product slowed in 2011 as 22 Japanese auto part plants suspended
production.

Efficient management of the supply chain can reduce costs, maximize customer value, and
maximize competitive advantage. It entails effective coordination and control of linked sectors,
departments, systems, and organizations.

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 Importance of Supply Chain
The following are the five major trends that have emerged to make supply chain management a critical
success factor in most industries:

1. Proliferation in product lines.

Companies have realized that more and more product variety is needed to satisfy the
growing range of customer tastes and requirements. This is evident from the fact that every
time a customer walks into a neighbourhood store, he or she is bound to discover a couple of
items on the shelf that he or she had not seen during his or her last visit and that he or she has
more varieties to choose from now. Even a simple product like toilet soap has 50-odd varieties.
Companies like HUL, in their personal care products, manage, on an average, 1,200
varities.
With increasing product variety, it becomes rather difficult to forecast accurately.
Hence, retailers and other organizations involved in the business are forced to either maintain
greater amount of inventories or lose customer

2. Shorter product life cycles

With increased competition, product life cycles across all industries are becoming
shorter. For example, technology leaders like Apple works with a life cycle as short as 6
months. So a firm like Apple , which has, on an average, just 5 days of inventory.
With shorter product life cycles, firms have had to change the way they manage their
inventories. Also, with shorter product life cycles, there is not much data available for demand
forecasting. Most of the technology firms find that 50 per cent of their revenue comes from
products that were introduced in the last three years.

3. Higher level of outsourcing

Firms increasingly focus on their core activities and outsource non-core activities to
other competent players. Michael Dell, the CEO of Dell Computers, had mentioned that if his
company was vertically integrated, it would need five times as many employees. Apart from
primary activities in the value chain, even support activities that were usually done in-house
are outsourced in a big way now.
Bharti Tele-Ventures, India’s number one private telecom service provider, has
outsourced network-management services, IT services and call centre operations. Higher level
of outsourcing makes supply chains more vulnerable, thereby forcing firms to develop different
types of supply chain capabilities within the organization.

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 4. Shift in power structure in the chain.
In every industry, the entities closer to customers are becoming more powerful. With
increasing competition, a steadily rising number of products are chasing the same retail shelf
space. Retail shelf space has not increased at the pace at which product variety has increased.
So there have been cases of retailers asking for slotting allowance when manufacturers
introduce new products in the market place.
Retailers have realized that they are powerful entities in the chain and hence expect the
manufacturers to be more responsive to their needs and demands.
Discount retailers like Wal-Mart have been asking their suppliers to replenish the
supplies on a daily basis based on actual sales data.
In general, manufacturers are forced to respond more quickly to the customers’
demands, because of changes in the power structure within the chain.

5. Globalization of manufacturing.
Over the past decade, tariff levels have come down significantly. Many companies are
restructuring their production facilities to be at par with global standards. Unlike in the past,
when firms use to source components, produce goods and sell them locally, now firms are
integrating their supply chain for the entire world market.
In the telecommunications and electronics industry, companies usually get their chips
from Taiwan, test them in Europe and finally integrate them with other products in the United
States of America to sell in the international market. This has made managing supply chains
extremely complicated

Decision Phases in a Supply Chain

Successful supply chain management requires many decisions relating to the flow of
information, product, and funds. These decisions fall into three categories or phases, depending
on the frequency of each decision and the time frame over which a decision phase has an .

1. Supply Chain Strategy or Design:

During this phase, given the marketing and pricing plans for a product, a company decides
how to structure the supply chain over the next several years.
It decides what the chain's configuration will be, how resources will be allocated, and what
processes each stage will perform.
Strategic decisions made by companies include
- whether to outsource or perform a supply chain function in-house,

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 - the location and capacities of production and warehousing facilities,
- the products to be manufactured or stored at various locations,
- modes of transportation to be made available and
- the type of information system to be utilized.
A firm must ensure that the supply chain configuration supports its strategic objectives.
Supply chain design decisions are typically made for the long term (a matter of years) and
are very expensive to alter on short notice. Consequently, when companies make these
decisions, they must take into account uncertainty in anticipated market conditions over the
next few years.
Reddy’s Laboratories Limited have chosen to concentrate on chronic Therapy dealing
in limited number of drugs with high profit margins is a strategic decision. This shift
supports the belief that Low Price Leadership Strategy has its limitations and cannot be
sustained over prolonged periods.

2. Supply Chain Planning:

For decisions made during this phase, the time frame considered is a quarter to a year.
The goal of planning is to maximize the supply chain surplus that can be generated over the
planning horizon given the constraints established during the strategic or design phase.
Companies start the planning phase with a forecast for the coming year in different markets

Planning includes making decisions regarding

- which markets will be supplied from which locations,

- the subcontracting of manufacturing,

- the inventory policies to be followed, and

- the timing and size of marketing and price promotions.

In the planning phase, companies must include uncertainty in demand,

exchange rates, and competition over this time horizon in their decisions.

As a result of the planning phase, companies define a set of operating policies that
govern short-term operations.

3. Supply Chain Operation:

The time horizon here is weekly or daily, and during this phase companies make
decisions regarding individual customer orders.

At the operational level, supply chain configuration is considered fixed, and planning
policies are already defined. The goal of supply chain operations is to handle incoming
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 customer orders in the best possible manner. During this phase,

- Set a date that an order is to be filled.

- Set delivery schedules of trucks.

- Allocate an order to a particular shipping mode and shipment.

- Generate pick lists at a warehouse.

- firms allocate inventory or production to individual orders

- place replenishment orders

Because operational decisions are being made in the short term (minutes, hours, or days),
there is less uncertainty about demand information. The goal during the operation phase is
reduction of uncertainty and optimize performance.

The design, planning, and operation of a supply chain have a strong impact on overall
profitability and success. It is fair to state that a large part of the success of firms like Wal-
Mart and Dell can be attributed to their effective supply chain design, planning, and
operation.

Key concepts in supply chain management

Traditionally, firms have focused their energies on three main functions: purchasing,
manufacturing and distribution. Transport and storage activities within individual functions
and across functions have not received adequate attention.

- Initially, supply chain management focused on the internal integration of activities in

these three functional areas with the logistics function.
- Gradually, firms realized that these activities have to be coordinated, not just within a
firm, but across the entire supply chain, keeping in mind the material/product flow, right
from the vendor to the end customer.
- To integrate material flow across the chain, information and financial flow across the
chain also have to be integrated. (refer figure)

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 Supply chain management involves coordinating various activities within and across
companies to ensure products are efficiently produced, delivered, and reach
customers. Traditionally, companies mainly concentrated on buying, making, and
distributing products. However, the processes of transporting and storing goods were
often overlooked.
Initially, supply chain management aimed to bring together the activities of
purchasing, manufacturing, and distribution within a company, along with the logistics
involved. Gradually, it became clear that these activities needed to be synchronized
not only within one company but throughout the entire supply chain, which includes
the journey of materials or products from suppliers to customers.
For this seamless coordination to happen, the flow of information and finances also
need to be integrated across the supply chain. Unfortunately, many obstacles exist
within and between departments and organizations. These groups tend to focus more
on their local performance rather than how it affects the entire chain. These obstacles
can create disruptions in the smooth flow of products.
Since most issues arise at these points of transition, it's important to study the
connections and relationships between different steps in the supply chain rather than
just looking at each step separately.
Usually, a supply chain involves multiple companies, but it's common practice to
analyze it from the perspective of a central company, often the one that gives the
product its brand identity, like Nike.
In simple terms, supply chain management is about making sure products are made,
moved, and delivered efficiently. It started with companies focusing on their own
tasks, but now they realize they need to work together across the entire supply chain.
This means sharing information and money, too. However, there are challenges at the
points where In different
most chains, theremeet,
groups exist many blocks,
causing both at theTo
disruptions. departmental
fix this, weand the organizational
need to look at
how these groups are
boundaries. connected
Individual and work
departments together.
and firms areWe usually
more studyinthis
interested by focusing
performance at the
on a main company in the supply chain, like Nike.
local level rather than the performance at the chain level. Thus, numerous bottlenecks occur
at the boundaries and the flow gets badly distorted.
Since most of the inefficiencies seem to creep in at the boundaries, while studying
supply chains, our focus will be on linkages rather than on individual operations.

Though a typical supply chain will have a large number of firms, the standard practice
is to analyse supply chains from the perspective of a focal firm ( The firm that provides
identity to the products in terms of brand) like Nike.

Supplier-Manufacturer-Customer chain

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 Pull and push systems in the supply chain process view are presented in the above figure. These
systems determine as to when to respond to customer order with minimal supply chain cost.

Processes in a pull system are executed when a customer order arrives at the retailer. The
retailer then fulfills the order based on actual demand. In basic terms, a customer pulls inventory from
the retailer’s shelf.

While the push system does the opposite. Processes are executed in response to forecast and
speculation based on demand signal. Push system enables the supplier to push inventory closer to the
customer.
Pull system is suited for make-to-order products. The company may not have to stock
inventory because it responds to actual demand rather than the forecast.
On the contrary, the push system works well with make-to-stock products because
the manufacturer needs to maintain the required service level in response to demand
fluctuation.

The following are the primary members of the simple, basic supply;
 Supplier
 Manufacturer
 Distributor
 Retailer
 Customer


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 Producers (Supplier/Manufacturer)
This includes companies that are producers of raw materials and companies that are
producers of finished goods.
Producers of raw materials are organizations that mine for minerals, drill for oil and gas,
and cut timber.
Producers of finished goods use the raw materials and sub-assemblies made by other
producers to create their products.

Distributors:
Distributors are companies that take inventory in bulk from producers and deliver to
customers. Distributors are also known as wholesalers. They sell products in larger
quantities. Distributors buffer the producers from fluctuations in product demand by
stocking inventory. They deliver products when and where the customer wants them.

Retailers:
Retailers stock inventory and sell in smaller quantities to the general public. This
organization also closely tracks the preferences and demands of the customers that it sells
to. It advertises to its customers to attract customers for the products it sells. Discount
department stores attract customers using price. Fast food restaurants use convenience and
low prices as their draw.

Customers:
Customers or consumers are any organization that purchase and use a product. A customer
organization may be an organization that purchases a product in order to incorporate it into
another product that they in turn sell to other customers.
Or a customer may be the final end user of a product who buys the product in order to
consume it.

Enablers/ Drivers of Supply Chain Performance (in reducing supply chain costs )

Three major enablers that have helped firms and nations in reducing supply chain costs are
briefly discussed below.

1. Improvement in Communication and IT

2. Emergence of Third-party Logistics Providers
3. Enhanced Inter-firm Coordination Capabilities

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 1. Improvement in Communication and IT

Computing power has become cheaper and communication costs too have come down. This
has helped firms in coordinating global supply chains in a cost-effective manner.
Advances in enterprise resource planning (ERP) systems have helped firms in automating
several business processes resulting in seamless information flow throughout the company across
different functions within organization.
Internet technology is likely to change the nature of information flow in inter firm transactions.
Now, even small firms can communicate with their chain partners using the worldwide web at a
fraction of the earlier cost.
Companies are realizing that they can replace physical inventory by information. To really
exploit their IT investments, companies need to re- engineer their supply chain and other supporting
organizational processes and try to replace physical inventory with information. Companies that have
successfully exploited IT have made major changes in their supply chain structure, systems, processes
and strategy.

2. Emergence of Third-party Logistics Providers

Traditionally, many firms have been managing their logistics activities internally. Lately,
companies have realized that they need to focus their energies on managing core business activities,
and hence have been exploring the possibility of outsourcing logistics activities to third- party
logistics (3PL) service providers.
In developed countries, almost 90 per cent of the logistics activities are outsourced and are
managed by 3PL companies. Apart from bringing in the much needed professionalism to the field,
3PL companies have economies of scale as they are able to pool demand across customers.
In developed markets, global firms would like leading 3PL companies to go beyond the
traditional role and play the role of a fourth-party logistics (4PL) company that can integrate the
capabilities, resources and technology so as to provide comprehensive supply chain solutions to its
customers.

3. Enhanced Inter-firm Coordination Capabilities

Successful coordination across a global network of companies has been a comparatively new
phenomenon in the corporate world. It has been realized that for a network to function meaningfully
one needs a firm to play the role of the strategic centre. Many companies, like Apple, Nike, and
Toyota, have successfully managed complex networks, played the part of the strategic centre and,
hence, have emerged as role models to other companies.
While each company in the network focuses on its core competencies, the strategic centres
function as a leading and orchestrating system. Consequently, supply chains become more efficient
and responsive. However, there have been a large number of failures also, where firms within the
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 chain could not align their interests, and as a result the network could not function effectively.
The industry is still on the learning curve in this matter, but better understanding and
coordination of issues would greatly help in diffusing the third supply chain revolution across all
industries.

Other drivers of Supply Chain Performance

1. Facilities
These are the actual physical locations in the supply chain network where product is stored,
assembled, or fabricated. The two major types of facilities are production sites and storage sites
Decisions regarding the role, location, capacity, and flexibility of facilities have a significant
impact on the supply chain’s performance.
2. Inventory
It encompasses all raw materials, work in process, and finished goods within a supply chain. The
inventory belonging to a firm is reported under assets. Changing inventory policies can dramatically
alter the supply chain’s efficiency and responsiveness.
3. Transportation
It entails moving inventory from point to point in the supply chain. Transportation can take the
form of many combinations of modes and routes, each with its own performance characteristics.
Transportation choices have a large impact on supply chain responsiveness and efficiency
For example, a mail-order catalog company can use a faster mode of transportation such as
FedEx to ship products, thus making its supply chain more responsive, but also less efficient given
the high costs associated.

4. Information
It consists of data and analysis concerning facilities, inventory, transportation costs, prices, and
customers throughout the supply chain.
is potentially the biggest driver of performance in the supply chain because it directly affects
each of the other drivers. Information presents management with the opportunity to make supply
chains more responsive and more efficient.

5. Sourcing
It is the choice of who will perform a particular supply chain activity such as production,
storage, transportation, or the management of information. At the strategic level, these decisions
determine what functions a firm performs and what functions the firm outsources.
Sourcing decisions affect both the responsiveness and efficiency of a supply chain. After
Motorola outsourced much of its production to contract manufacturers in China, it saw its efficiency

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 improve but its responsiveness suffer because of the long distances. To make up for in
responsiveness, Motorola started flying in some of its cell phones from China even though this choice
increased transportation cost.

6. Pricing
It determines how much a firm will charge for the goods and services that it makes available
in the supply chain. Pricing affects the behavior of the buyer of the good or service, thus affecting
supply chain performance.
For example, if a transportation company varies its charges based on the lead time provided
by the customers, it is likely that customers who value efficiency will order early and customers who
value responsiveness will be willing to wait and order just before they need a product transported.

Supply chain strategy

A firm’s supply chain strategy should ensure that its supply chain provides superior value to
the end customer in an efficient manner. Firms must recognize the nature of trade-offs between
customer service and costs and arrive at an optimal decision.
Customer Service and Cost Trade-offs
A firm must ensure a smooth fit between its business strategy and supply chain strategy. To
understand the relationship between the supply chain strategy and the business strategy, we need to
understand cost versus service trade-offs in business.

For a given supply chain design, firms generally have an efficient frontier, which defines the
nature of trade-offs between supply chain costs and customer service. An efficient frontier, shown in
Figure, provides a lower envelope, below which a firm cannot choose to operate.

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 In other words, if a firm is on the efficiency frontier, it represents the best attainable
compromise between the two dimensions at any given point in time.
If the supply chain operations of a typical firm are to be mapped, the firm will lie somewhere
above the efficiency frontier curve, as shown in Figure. This is because most firms do not operate
their supply chains efficiently.
The demand and price that a company commands in the market are a function of customer
service. So a company works to optimize its performance based on the interaction between the
revenue curve and the total cost curve.

As shown in the figure1, the revenue response to customer service level is usually found to be
an S-shaped curve. First, there is a minimum threshold level of service, below which a firm is not
able to attract many customers. Similarly, there is a point beyond which any improvement in service
will not produce a significant increase in demand. Total costs increase exponentially with increase in
service. Therefore, it will be optimal for a firm to operate at a specific level of customer service. as
shown in figure 2.
However, customer service in itself has multiple dimensions. From a supply chain perspective,
customer service consists of the following four dimensions:
• Order delivery lead time
• Responsiveness
• Delivery reliability
• Product variety

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 Order Delivery Lead Time:

Order delivery time is the time taken by the supply chain to complete all the activities from
order to delivery.
As shown in figure, a typical firm sources material, manufactures components, assembles the
product and delivers the finished product to the end customer, with each of these activities having a
certain lead time. If we aggregate all the four lead times, we get the supply chain lead time, which is
the total time required for the supply chain to carry out all activities from the beginning to the end.
Unfortunately, for many firms, supply chain lead times and order delivery lead times usually do not
match.
The point at which the customer enters the supply chain is called the order penetration point.
After the order penetration point, all activities do not face any uncertainties because they are against
specific customer orders. All the activities prior to the customer order must be carried out against
forecast and not on actual orders.
There are essentially three types of supply chains characterized by the customer order
penetration point: make to stock (MTS), make to order (MTO) and configure to order (CTO).

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 MTS: If customers expect their order to be fulfilled instantaneously, then the supply chain is in the
MTS business.
Ex: Consumer products business where the customer expects the products to be on the shelf at the
retailer’s outlet.
MTO: If the customer gives enough time to the manufacturer to carry out the complete set of
operations after placing the order, it is in the MTO business.
Ex: Equipment manufacturers where all the activities are started after getting the order.
CTO: If the supplier gives enough time to the firm to assemble the product before delivery, it is in the
CTO business
Ex: A firm in the pizza home delivery business, because your pizza is configured the way you want,
with the toppings of your choice, using ingredients kept in readiness, prior to an order.

Push–Pull Boundary of the Supply Chain

Order delivery lead time also can be used for drawing a push–pull boundary of the supply chain.
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 All the processes carried out before the customer order point are managed through the push
approach, and all the processes carried out after the customer order are managed through the pull
approach. The interface between the push-based processes and the pull-based strategy is known as
the push–pull boundary.
Firms like Asian Paints and Dell Computers are able to assemble and deliver a wide variety of
finished goods demanded by the end customer from relatively few components stocked at the push–
pull boundary.

In MTS supply chains: the push–pull boundary is at the end of chain and all processes are managed
using the push approach.
In MTO supply chains, all processes are managed using the pull approach and the push–pull boundary
is located at the beginning of the chain.
In CTO supply chains, the push–pull boundary is usually positioned after component manufacturing.

Supply Chain Responsiveness

Responsiveness captures the firm’s ability to handle the uncertainty of market demand. Based
on the nature of demand uncertainty, products can be classified as functional products or innovative
products
Functional products (grocery) are those that satisfy the basic needs of a customer and therefore have
- Low variety,
- Stable
- Predictable demand,
- Long life cycles
- Low profit margins.
Innovative products (fashion and technology products) are those that try to satisfy a broad range of
customers’ wants and have the following features:
- High variety,
- Unstable
- Very-hard-to-predict demand,
- Short life cycles,
- High profit margins
- Frequent stock-outs and markdowns.

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Department of Mechanical Engineering, Vemana I T
 Functional products need efficient supply chains, while innovative products need responsive chains.
As shown in the following Figure, firms must ensure an appropriate match between the type of supply
chain and the nature of product characteristics.

Delivery Reliability
Delivery reliability measures the fraction of customer demand that is satisfied within the
promised delivery lead time.
For firms operating on an MTS model, the percentage of orders getting served from the stock
is known as product availability. Similarly, for companies offering products based on the CTO or
MTO model, delivery reliability captures the percentage of orders that are delivered within the
promised delivery lead time.
Essentially, firms have to tradeoff inventory costs and stock-out costs to arrive at the optimum
service level. In the MTS business, a firm has to keep higher inventory if it is to offer higher levels of
service. Firms in the CTO business will have to hold higher inventory before the order penetration

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Department of Mechanical Engineering, Vemana I T
 point and after that slack capacity in the system if they want to offer higher delivery reliability to
customers. Firms in the MTO business will have to work with slack capacity in the entire system if
they want to offer high delivery reliability.
(Slack capacity: It represents the quantity of labor and capital that could be employed productively,
but isn't; instead, it is idle)
In general, firms will have to arrive at an optimal trade-off between cost and service level while
deciding on this issue.
Product Variety
Higher product variety offers greater choices to the customer who is likely to get a product that
fits closest to his or her actual requirements. Some firms like Dell Computers go to the extent of
allowing their customers to design their own products.
Obviously, higher variety would lead to greater complexity, resulting in higher supply chain
costs.
While deciding the optimum level of product variety, a firm has to manage trade-offs with
other dimensions of customer service like order lead time. For example, if you go to a fast food outlet,
you know there is less variety but expect food to be served in a few minutes; in a restaurant, you are
ready to wait for 15–20 minutes but do expect a greater variety.
Modular design: Helps the firms to offer a large variety without increasing the complexity of
the supply chain

Supply Chain Performance Measures

Supply-Chain Council is an independent, non-profit, global corporation interested in getting
the industry to standardize supply chain terms so that meaningful supply chain benchmarking can be
carried out. It has developed the Supply Chain Operations Reference (SCOR) model as the industry
standard for supply chain management. Several supply chain software vendors have adopted the
SCOR performance measures in their performance management module.
As per the SCOR (Supply Chain Operations Reference) model, supply chain performance measures
are:
- Cost
- Assets (Asset Management Efficiency)
- Reliability
- Responsiveness
- Agility
Further, the SCOR model develops 10 performance measures as shown in Figure.
The Supply-Chain Council refers measures related to costs and assets as internal-facing

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Department of Mechanical Engineering, Vemana I T
 measures, while reliability, responsiveness, and agility are termed as customer-facing measures.
The use of standard measures allows firms to carry out meaningful benchmarking studies.

Benchmarking studies carried out by the Supply-Chain Council have shown that there are
significant differences in performance across firms in various industries.

Such significant differences in performance also mean that firms seem to follow a wide variety
of processes and systems. The best in the class firms seem to work with substantially lower supply
chain costs.
While relating the SCOR model to the cost versus customer service trade-off framework, we
combine costs- and assets-related measures
Supply chain benchmarking using frameworks like SCOR is difficult to implement in countries
in Asia where data availability is a big problem. Alternatively, fewer but important metrics like cost
and assets utilization data, for which data are available in financial statements of listed companies.

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Department of Mechanical Engineering, Vemana I T