SUPPLY CHAIN

MANAGEMET
MODULE-1
What is supply chain
management ?
• The supply chain includes 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.
• 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.
Supply Chain Network

Figure 1.1 Supply Chain Network

Evolution of Supply Chain
Management
• The First Revolution (1910–1920): Vertical Integrated Firms Offering
Low Variety of Products

• The Second Revolution (1960–1970): Tightly Integrated Supply

Chains Offering Wide Variety of Products

• The Third Revolution (1995–2020): Virtually Integrated Global

Supply Networks Offering Customized Products and Services
 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. Through
its tightly integrated chain, it could manage the journey from the iron
ore mine to the finished automobile in 81 hours. However, as the
famous saying goes, the Ford supply chain would offer any colour, as
long as it was black; and any model, as long as it was Model T. 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.
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/encouraged in the second revolution.
The Third Revolution (1995–2020): Virtually
Integrated Global Supply Networks Offering
Customized Products and Services
• 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. Users can personalize the music and other media content on
their device through the various features available on iPod.
• Similarly, Bharti Airtel allows services like My Airtel through which
customer can have unique personalized experience.
Decisions in a Supply Chain
Successful supply chain management involves several decisions with
varying time frames. We can broadly classify them as

• Design Decisions
• Operations Decisions
Design Decisions
• Supply chain design (network design) or strategic decisions involve
the following critical issues:
• What activities should be carried out by the nodal firm and what
should be outsourced?
• How to select entities/partners to perform outsourced activities and
what should be the nature of the relationship with those entities?
Should the relationship be transactional in nature or should it be a
long-term partnership?
• Decisions pertaining to the capacity and location of the various
facilities.
Operations Decisions
• Demand forecasting
• Procurement planning and control
• Production planning and control
• Distribution planning and control
• Inventory management
• Transportation management
• Customer order processing
• Relationship management with partners in the chain
The Importance of the Supply
Chain
• In the past, customers were not very demanding and competition was
not really intense. As a result, firms could afford to ignore issues
pertaining to the supply chain. Today, firms that do not manage their
supply chain will incur huge inventory costs and eventually end up
losing a lot of customers because the right products are not available
at the right place and time. The following are the five major trends
that have emerged to make supply chain management a critical
success factor in most industries.
The Importance of the 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.
2. Shorter product life cycles.
3. Higher level of outsourcing.
4. Shift in power structure in the chain.
5. Globalization of manufacturing.
 Proliferation in product lines
• More and more product variety is needed to satisfy the growing range
of customer tastes and requirements.
• We define stock-keeping unit (SKU) as a unit of variety. For example,
the same brand of soap may be offered in varying colours and sizes.
• Companies like HUL, in their personal care products, manage, on an
average, 1,200 SKUs. 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 customers.
 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.

The term product life cycle refers to the length of time a product is
introduced to consumers into the market until it's removed from the
shelves.
 Higher level of outsourcing.

• Firms increasingly focus on their core activities and outsource non-

core activities to other competent players.
• Bharti Tele-Ventures, India’s number one private telecom service
provider, has outsourced network-management services, IT services
and call centre operations. This trend towards outsourcing is
irreversible but a higher level of outsourcing makes supply chains
more vulnerable, thereby forcing firms to develop different types of
supply chain capabilities within the organization.
 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. here is a
clear shift in the power structure.
• 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. In general, manufacturers are forced to respond more quickly to
the customers’ demands, because of changes in the power structure within
the chain.
 Globalization of manufacturing.

• 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.
• For example, companies like ABB have developed some global centres
of excellence for each of their product lines that take care of the
global market.
• General Motors is talking about a world car and has been designing a
few cars for global markets.
 Globalization of manufacturing.

• 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. Unlike
information and finance flow, which can be managed electronically,
materials and products have to move physically, and as this
movement can even be across continents, managing supply chains is
now an extremely complex issue.
 Enablers of supply chain
performance
• For example in a country like the United States of America,
logistic costs used to account for 15 percent of gross
domestic product (GDP) in the 1980s. Today because of
Innovations in technology and management practices logistic
costs account for 8.5 per cent of GDP.
• Gross Domestic Product (GDP) is the monetary value of all
finished goods and services made within a country during a
specific period.
Enablers of supply chain
performance
1. Improvement in communication and IT
2. Entry of third-party logistic providers
3. Enhanced inter-firm coordination capabilities
 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.
• The way ERP systems have changed the nature of information flow
within organization, Internet technology is likely to change the nature
of information flow in interfirm transactions
 Enterprise Resource Planning
(ERP)
• ERP stands for "Enterprise Resource Planning" and refers to software and
systems used to plan and manage all the core supply chain,
manufacturing, services, financial and other processes of an organization.
Enterprise Resource Planning software can be used to automate and
simplify individual activities across a business or organization, such as
accounting and procurement, project management, customer relationship
management, risk management, compliance and supply chain operations.
 Entry of third-party logistic 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.
 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, Benetton, Nintendo, Sun and
Toyota, have successfully managed complex networks, played the part
of the strategic centre and, hence, have emerged as role models to
other companies.
 Supply Chain Performance in
India
• Supply Chain Performance can be measured in terms of inventory
turnover ratio at the organizational level and logistics costs at the
economy level.

• Logistics costs include inventory-carrying costs, transportation costs

and logistics administration costs.
• The Inventory turnover is a measure of the number of times
inventory is sold or used in a time period such as a year. It is
calculated to see if a business has an excessive inventory in
comparison to its sales level. The equation for inventory turnover
equals the cost of goods sold divided by the average inventory
• In a general business sense, logistics is the management of the flow
of things between the point of origin and the point of consumption to
meet the requirements of customers or corporations.
• The resources managed in logistics may include tangible goods such
as materials, equipment, and supplies, as well as food and other
consumable items.
Ratio of logistic cost with GDP
Performance of Indian
Manufacturing Industry
Sector-wise Inventory
performance of India
Challenges in Maintaining a Supply
Chain in India
• Taxation Structure Drives Location Decisions
• Poor State of Logistics Infrastructure
 Taxation Structure Drives Location Decisions

• In India, most decisions pertaining to facility location have been driven by taxation
considerations and not by customer service issues.
• For example, almost all pharmaceutical manufacturers have located their facilities at
Baddi (Special Economic Zone : Different Economic laws)in Himachal Pradesh not
because of either market access or resource access, but because Baddi offers taxation
benefits (Exemption of excise duty is around 16.3%).
• Similarly, air conditioners and diesel power generators are manufactured in Silvasa
(Union Territory- Between Gujarat & Maharashtra). Special economic zones offer
taxation benefits, and many firms have altered their plant location decisions, driven by
these considerations.
• Though taxation issues cannot be ignored, given the fact that India has poor road
infrastructure.
• For financial year 2021, the proportion of infrastructure investments to the gross
domestic product (GDP) was estimated to be nearly four percent
• Officials of the National Highways Authority of India (NHAI) estimate the average cost
of building fourlane highways at Rs 8-9 crore per km and six-lane highways at around
Rs 14 crore per km, inclusive of land costs
Baddi - Himachal Pradesh
• Reddy's Laboratories, Cadila Healthcare, Torrent Pharmaceuticals, Abbott
Laboratories, Glenmark Pharmaceuticals, and Manjushree Technopack. Baddi houses
a total of 3,120 factories belonging to leading pharma, FMCG and textile companies
among others and which generate an annual turnover of Rs 60,000 crore.
• Airwaves Internet Pvt Ltd.
• Ancorotti Cosmetics India Pvt Ltd.
• Aishwarya Healthcare
• Auro Textiles(Vardhman)
• Bharti Infotech.
• Emmbros Auto Comp Ltd. ...
• Indo Farm Equipment Ltd. ...
• Kamla Oleo Pvt Ltd
Silvassa
In 1965. There are more than 45 private Industrial Estates in the UT. Thereafter,
three Government Industrial Estates have been developed at Silvassa, Masat
and Khadoli in the territory during 1972-85. There are 3175 Industrial Units of
which 2620 are in the Micro/Small sector and 590 in Medium/ Large scale
sector.
• Alankar Boilers And Pressure Vessels Pvt Ltd
• Reliance Industries.
• Sterlite Copper Ltd.
• Akshar Greens.
• Tropical Greens.
• Kothari Corporation.
• Faze Three Ltd.
• Monsanto India Ltd.
 Poor State of Logistics Infrastructure

• Both the transportation and the warehousing industry are in the

unorganized sector. About 90 per cent of the trucks in the country belong
to owners who have less than five trucks.
• An unorganized trucking industry, such as this, results in unreliable lead
times and high in-transit damages. With lots of old trucks on the road,
breakdowns are quite frequent, further adding to unreliability.
• Modernizing warehouse management is an idea that is yet to see the light
of the day in India.
• Modern warehouse management systems operate with real-time data,
allowing the organization to manage the most current information on
activities like orders, shipments, receipts and any movement of goods.
 Supply Chain Strategies
• A firm’s supply chain strategy should ensure that its supply chain
provides superior value to the end customer in an efficient manner.
Value offering (bundling of goods and services) to a customer should
be available at a reasonable price.
• In almost all product categories, customers want more variety and
quicker services at lower prices. Firms must recognize the nature of
trade-offs between customer service and costs and arrive at an
optimal decision on this front.
• If various processes and decisions within the chain are not aligned to
suit a company’s business strategy, it obviously cannot remain
competitive in the long run.
 Customer Service and Cost
Trade-offs
• A firm must ensure a smooth fit between its business strategy and
supply chain strategy.
• As a part of its business strategy, the firm decides the market segment
in which it wants to operate and the level of customer service it wants
to offer.
• The supply chain strategy includes issues of cost that the firm has to
incur to provide the targeted level of customer service.
Supply Chain Trade-offs
 Four Dimensions of Customer
Service
• Order delivery lead time
• Responsiveness
• Delivery reliability
• Product variety
 Order Delivery Lead Time

Order delivery time is the time taken by the supply chain to complete
all the activities from order to delivery
• A critical characteristic of the supply chain is the customer order
penetration point or decoupling point.
• 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).
• Figure 2.4 is a conceptual representation of these three types of
supply chains. If customers expect their order (an order can either be
a formal document or even an informal instruction, e.g., a customer
asking a retailer for a tube of tooth paste is treated as an order) to be
fulfilled instantaneously, then the supply chain is in the MTS business.
If the supplier gives enough time to the firm to assemble the product
before delivery, it is in the CTO business. If the customer gives enough
time to the manufacturer to carry out the complete set of operations
(source, make, assemble and deliver) after placing the order, it is in
the MTO business.
Order penetration point based
Supply Chain Typology
 Responsiveness

• Responsiveness captures the firm’s ability to handle the uncertainty of

market demand.
• In addition to delivery lead time, supply chains have also been
characterized on the basis of the nature of demand uncertainty faced
by products in the market place.
• Based on the nature of demand uncertainty, products can be
classified as functional products or innovative products.
 Delivery reliability
• Delivery lead time is an important dimension of customer service, and
delivery reliability essentially captures the degree to which a firm is
able to service its customers within the promised delivery time.
• Delivery reliability measures the fraction of customer demand that is
satisfied within the promised delivery lead time.
 Product variety
• The quantum of variety offered by a firm is an important dimension of
customer service. In the past couple of years, a “variety explosion”
has taken place in most product categories.
• 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 and National Panasonic go to the
extent of allowing their customers to design their own products
 Supply Chain Performance
Measure

• The 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.
SCOR recognizes six major processes: Plan, Source, Make, Delivery,
Return, and Enable.
 Supply chain operations
reference model (SCOR) model
As per the SCOR model, supply chain performance measures fall under
the following five broad categories:

• Cost
• Assets (Asset Management Efficiency)
• Reliability
• Responsiveness
• Agility
SCOR Model Supply Chain
Metrics
 Bench Marking Supply Chain
Performance Using Financial
Data
Total length of the chain. The total length of the chain is arrived at by adding up
the days of inventory for raw materials, work in progress and finished goods. The
firm that has the minimum total length of the chain is said to have the best
performance.
Supply chain inefficiency ratio. This ratio measures the relative efficiency of
internal supply chain management. The ratio will be low for the firms with better
performance.
Supply chain working capital productivity. The analysis of firms on this metric
will also be based on the levels of inventory, accounts receivable and accounts
payable. Firms with efficient supply chains will usually have high supply chain
working capital productivity.
Calculating the Length of
Various Stages of the Chain
• The following formulae (terms defined in Table 2.2) are used to
calculate the length of the various stages in the supply chain:
• DRM, DWIP, DFG = Days of raw material, work in process and finished
goods, respectively
DRM = RM × 365/CRM,
• DWIP = SFG × 365/CP,
• DFG = FG × 365/CS
• Total length of chain in days = DRM + DWIP + DFG
• The duration of time taken by the material flow is captured by this
measure. Firms like
• Dell Computers perform very well on this dimension.
Evaluating the Efficiency of
Supply Chain Management
• The internal supply chain inefficiency ratio is a measure of the
efficiency of internal supply chain management. To calculate this ratio,
we consider total inventory carrying costs and the distribution costs
to be components of the internal supply chain management costs. We
calculate the internal supply chain inefficiency ratio as follows:
SCC = DC + INV × ICC
and SCI = SCC/NS
• where SCC is the supply chain management costs, ICC is the inventory
carrying cost and SCI is the supply chain inefficiency ratio
Supply Chain Working Capital
Productivity
• The supply chain working capital productivity is calculated using the
following formula:
SWC = INV + AR − AP

• where SWC is the supply chain working capital.

SWCP = NS/SWC