SCLM

SUPPLY CHAIN?
A supply chain consists of all parties involved, directly or indirectly, in fulfilling a customer request.
The supply chain not only includes the manufacturer and suppliers, but also transporters,
warehouses, retailers, and customers themselves. So if you want to answer of “what is supply
chain?”, you should consider all those facts.

Within each organisation, such as a manufacturer, the supply chain includes all functions involved
in receiving and filling a customer request. These functions include, but are not limited to, new
product development, marketing, operations, distribution, finance, and customer service.
Consider a customer walking into a Wal-Mart store to purchase detergent. The supply chain begins
with the customer and their need for detergent. The next stage of this supply chain is the Wal-Mart
retails store that the customer visits.

Wal-Mart stocks its shelves using inventory that may have been supplied from a finished goods
warehouse that Wal-Mart managers or from a distributor using trucks supplied by a third-party. The
distributor, in turn, is stocked by the manufacturer (say Proctor & Gamble [P&G] in this case).
The P&G manufacturing plant receives raw material from a variety of suppliers who may themselves
have been supplied by lower tier suppliers. For example, the packaging material may come from
Tenneco packaging while Tenneco receives raw materials to manufacture the packaging from other
suppliers.

What is Supply Chain?

A supply chain is dynamic and involves the constant flow of information,
product, and funds between different stages. In our example, Wal-Mart
provides the product, as well as pricing and availability information, to the
customer.

The customer transfers funds to Wal-Mart. Wal-Mart conveys point-of-sales

data as well as replenishment orders to the warehouse or distributor, who
transfers the replenishment order via trucks back to the store. Wal-Mart
transfers funds to the distributor after the replenishment.
The distributor also provides pricing information and sends delivery schedules
to Wal-Mart. Similar information, material, and fund flows take place across
the entire supply chain.
In another example, when a customer purchases online from Dell Computer,
the supply chain includes among others, the customer. Dell’s Web site that
takes the customer’s order, the Dell assembly plant, and all of Dells suppliers
and their suppliers.

The website provides the customer with information regarding pricing,

product variety, and product availability. Having made a product choice, the
customer enters the order information and pays for the product. The
customer may later return to the Web site to check the status of the order.

Stages further up the supply chain use customer order information to fill the
order. That process involves an additional flow of information, product, and
funds between various stages of the supply chain.

These examples illustrate that the

customer is an integral part of supply chain. The primary purpose for the
existence of any supply chain is to satisfy customer needs, in the process
generating profits for itself.

Supply chain activities begin with a customer order and end when a satisfied
customer has paid for his or her purchase. The term supply chain conjures up
images of product or supply moving from suppliers to manufacturers to
distributors to retailers to customers along a chain.

The terms supply chain may also imply that only one player is involved at
each stage. In reality, a manufacturer may receive material from several
suppliers and then supply several distributors. Thus, most supply chains are
actually networks. It may be more accurate to use the term supply network or
supply web to describe the structure of most supply chains.
A typical supply chain may involve a variety of stages. These supply chain
stages include:

 Customers
 Retailers
  Wholesalers/distributors
 Manufacturers
 Component/raw material suppliers

Each stage need not be present in all supply chain model. The appropriate
design of the supply chain will depend on both the customer’s needs and the
roles of the stages involved. In some cases, such as Dell, a manufacturer may
fill customer orders directly. Dell builds-to-order: that is, a customer order
initiate manufacturing at Dell. Dell does not have a retailer, wholesaler, or
distributor in its supply chain. In other cases, such as the mail order company
L.L. Bean, manufacturers do not respond to customer orders directly.
In this case, L.L.Bean maintains an inventory of product form which they fill
customer orders. Compared to the Dell supply chain, the L.L.Bean supply
chain contains an extra stage (the retailer. L.LBean itself) between the
customer and the manufacturer.
In the case of other retail stores. The supply chain may also contain a
wholesaler or distributor between the store and the manufacturer.

WHAT IS A SCM ?
Supply chain management is the integrated process-oriented planning and control of the flow of
goods, information and money across the entire value and supply chain from the customer to the
raw material supplier.
The Council of Supply Chain Management Professionals (CSCMP) defines SMC as follows:
“Supply chain management encompasses the planning and management of all activities involved in
sourcing and procurement, conversion, and all logistics management activities. Importantly, it also
includes coordination and collaboration with channel partners, which can be suppliers,
intermediaries, third party service providers, and customers. In essence, supply chain management
integrates supply and demand management within and across companies.”

Why Does Supply Chain Management Matter?

The concept of labor division is undergoing a revolution. To increase profitability,
companies used to divide the various work steps between their employees. Today,
global organizations divide the various tasks in the value chain amongst each other. The
sub-products travel gigantic distances. Nevertheless, the companies can manufacture
more quickly and more cheaply than a single company could. In this way, integrated
planning can open up new markets. However, the companies become dependent on each
other. These business relationships require closer cooperation and a more intensive
exchange of information.
 The Difference Between Logistics and Supply Chain Management
Previously used as a synonym, supply chain management, in contrast to logistics, goes
beyond the confines of a company. Both supply chain management and logistics deal
with the organization of object flows along the process stages of the supply
chain. Both are aimed at increasing customer benefits (effectiveness) and system-wide
improvement of the cost-benefit ratio (efficiency).

Modern supply chain management goes a step further, especially in the areas of
transport and warehousing within the company. SCM explicitly includes the organization
and coordination of autonomous business units within a value chain its the analysis. This
accentuates the inter-organisational aspect of logistics management. SCM takes a cross-
company perspective on all business processes and connects all areas of business
administration, such as purchasing, production, distribution, marketing, controlling, etc.
Focused on the strategic aspects of functional areas, SCM leaves tactical questions to the
individual participants.

Tasks and Objectives of Supply Chain Management

SCM ensures cross-company, process-oriented planning and control of the entire value
chain. Consumers force logistics to rethink, which is why high customer expectations
and short product life cycles are taken into account. Furthermore, relationships with
suppliers are considered in order to optimally design and control goods deliveries, cash
flows and information flows (Supplier Relationship Management).

Functions Within Supply Chain Management:

 Customer Relationship Management: Consistent focus on end customer demand to

meet the increasing customer requirements and ensures a high degree of flexibility.

 Flexibility and demand-oriented production: Continuous cost reduction and

resource optimization across all stages of the value chain.

 Synchronization of supply and demand: Increasing the adaptability and

development capability of the supply chain.
Several sub-objectives can be derived from these long-term objectives:

 Inventory reduction along the value chain,

 Reduction of warehousing costs,

 Safeguarding the just-in-time supply,

 Acceleration of cash-to-cash cycles,

 Improvement of delivery reliability,

 Reduction of throughput times.

Supply Chain Management with Zara as an Example
How successful supply chain management works is demonstrated by Inditex, one of the
largest textile companies in the world based in Arteixo (Spain), with its fashion brand
Zara. There are many case studies about the success story of the Inditex model and they
are worth reading. Zara's supply chain management expertise is confirmed by the
benchmark of US market research firm Gartner, which provides an overview of the best
supply chains in Europe.

In brief, the case is as follows:

Fashion brands are relocating their production to China. This saves costs, but
complicates the management of the supply chain. Fashion trends, in particular, are short-
lived. The journey of cargo in container ships halfway around the world complicates the
principle of fast fashion.

Inditex, on the other hand, purchases more than half of its products from Spain, Portugal
and Morocco. The costs are higher, but shorter supply chains allow them to react
more quickly to trends. Zara no longer speculates on the latest fashion. Production is
suspended until it is certain what the customer is actually going to buy. The goods are
sold at full price and stocks remain minimal.

Motivation and Advantages of Supply Chain Management

Today, companies cannot guarantee competitiveness for their products and services on
their own. The entire supply chain contributes to success. No longer are individual
companies in competition, but entire supply chains. With the promise of a long-
term win-win situation for each individual participant, companies can be persuaded to
become part of a supply chain. Tip: The Guide for the successful integration of
companies in supply chains provides valuable support!

Unsolved Supply Chain Management Problems Can Lead to Disadvantages

 The rapid development in information technology has made all of this progress
possible. Nevertheless, there are numerous problems along the supply chain that make
successful implementation of supply chain management difficult in practice.

 Mutually exclusive goals: The companies involved in the supply chain can pursue
different, sometimes mutually exclusive goals.

 Distribution of costs, risks and profits: A further hurdle is the fair distribution of
cost and financing burdens or risks and the distribution of value-added shares.

 Lack of transparency of the processes: The different competence levels of the

partners and the fear of the exploitation of knowledge causes a lack of transparency of
the processes between the actors.

 Lack of uniform key figures: Agreement with the partner companies on internal,
uniform key figures and technical transfer standards.

 Increasing dependency: Companies need to work more closely together and exchange
information more intensively.

 Legal issues: What do contracts look like between partners exchanging sensitive
internal company data and how are violations of the agreement punished?

 Building relationships based on partnership: How do you organize trust without

being dependent on a handful of employees who maintain these relationships?
Management concepts for building and maintaining such relationships are required.
Sustainability through Sustainable Supply Chain Management
Sustainability - a principle of resource consumption in which the preservation of
essential properties, stability and the natural regenerative capacity of a system take top
priority - is becoming a worldwide trend. The SSCM is guided by this approach. Driven
by the demands of stakeholders such as the end consumer, the criteria of ecology,
economy and society are derived. It is important for companies that strive to achieve
the future-oriented mindset of the SSCM to pay equal attention to the three
dimensions of sustainability. In contrast to conventional supply chain management,
both the origin of the products and their use and disposal after sale are important. If your
SSCM does not correspond to the practical situation in German companies, there are 5
approaches for sustainable intralogistics to keep in mind.
 7 Prerequisites for a More Successful SCM
For companies, SCM entails a change of processes and culture. Its objective is to
optimize processes, increase performance characteristics, reduce costs and increase
customer satisfaction. In order to be successful in supply chain management, you must
meet these seven requirements:

1. Interdisciplinary Cooperation

Process networking requires comprehensive cooperation. This awareness is necessary to

build up the necessary know-how.

Our recommendations:

 Make yourself aware that SCM does not end at the company premises.

 Know and understand the process chain and its relationships.

 Focus on joint solutions instead of self-optimization.

 Make your contribution to optimization.

 Minimize the risk in the entire chain and not only your own risks.

 Adapt the SCM process to changing circumstances.

2. Open Exchange of Information

Aim for an open exchange of information with all companies involved in the supply
chain. Confirm unrealistic plans: The intelligent and the qualified are successful,
not the stronger one.

Our recommendations:

 Talk openly about the strengths and weaknesses of your technical processes.

 Admit internal risks to your business partners.

 Report changes openly and at short notice.

 Position your business partner so that his or her strengths can help you.
 Use the opportunities to motivate your business partner with your honesty.
3. Fast Responsiveness

The ability to react more quickly to changes represents qualified process networking.

Our recommendations:

 Create opportunities to illustrate the required changes, e.g. a change in customer needs.

 Adjust customer and material purchase orders to current material replacement times so
that the planning horizon corresponds to the supply documents.

 Identify the need for action by projecting the actual status within the process chain using
key figures.

 Motivate your employees to embrace this rapid responsiveness.

 Prevent any delay to avoid lasting damage to the process chain.

 Pay attention to quality despite this speed.

4. Short Process Times

The relation between the production times and the process times in the upstream
processes serves as an indicator for the reaction speed. While the production times
amount to a few hours or days, the operative process times in upstream processes may
take several days. Put these times into question.

Our recommendations:

 Measure the process times away from production.

 Determine how long it takes for a customer to be provided with a reliable order
confirmation.

 Capture all process times and develop a concept to shorten them.

 A lengthy process time is often caused by the quality of the work tools, the lack of
transparency and the lack of process speed. The key to success is an ERP system.
 5. Powerful ERP System

The prerequisite for the required speed and dynamism within the supply chain is a
qualified ERP system. The manual execution of standard processes is a thing of the past.
We recommend to examine the suitability of the ERP system carefully. Establish a
sustainable performance profile with IT systems to reduce complexity in logistics.

Suitable ERP systems support your employees in the following areas:

 Automated production planning processes,

 Intelligent review processes in order management,

 Notification of employees in charge if action is required,

 Automated dunning processes,

 Automated import of parts lists,

 Support tools for quotation calculations.

6. Holistic Logistics

The integration of information, material and process logistics is not a simple task. Adjust
these processes to fit into the chain and do not underestimate the impact of disturbed
chain links.

Our recommendations:

 Are you familiar with batch sizes, framework agreements and customer purchase
commitments?

 Avoid delays in communicating changes.

 Reduce risks by using comprehensive logistics systems.

 Facilitate fast action by establishing time-saving IT connections between the

participants in the supply chain.

 Increase the chance for your own adaptation by acting quickly without causing damage.
 Safeguard the success of supply chain management by integrating all areas concerned:
Production planning, customers, suppliers, purchasing, sales and production.
7. Clear and Binding Rules

A qualified supply chain can only be created if clear process rules and responsibilities
are established. A discreet omission of these guidelines poses a typical vulnerability.
Define clear rules and follow them.

We recommend the adoption of the following rules:

 Processes including process times,

 Responsibilities,

 Requirements within the supply chain,

 Harmonized key figures for internal and external evaluation,

 Escalation mechanisms that ensure successful conflict management.

Supply Chain Management Software and Systems

Software solutions for the value chain are required. Companies are aiming for higher
investments in software and technology in their supply chain. At the same time, the
focus is shifting from pure cost reduction and resource optimization in the process chain
to the needs of customers. In view of the constantly changing industry environment,
choosing the right software is crucial. What are your long-term objectives? The
guide to software for the manufacturing industry is intended to help manufacturers find
the best system. The guide discusses five key areas relevant to any successful
manufacturing operation, including supply chain management software systems.

Identifying Limits — Even in Supply Chain Management

Due to lower transport costs, the shipping costs per volume or mass unit is often no
longer a factor in planning.

Just-in-time systems cause two major problems in practice:

 Overloaded docks and loading ramps due to CEP services and small-scale deliveries
 Vulnerable structures (traffic jams, strikes, ...) due to long and frequent transport
operations
Telematics systems alleviate the symptoms, but do not eliminate the cause. Clear
guidelines put pressure on suppliers to cooperate and minimize risk by introducing
additional criteria when planning the value chain. No matter how sophisticated supply
chain management may be, lack of communication between customer and supplier and
inadequate specifications can lead to major losses in the market or for the customer.

Jobs, Salary and Career in Supply Chain Management

Supply chain management as a sub-area of logistics is gaining in importance.
Applicants for job offers in Supply Chain Management are advised to complete a
business training at a logistics service provider. Studying economics with a
specialization in logistics increases the chance of obtaining a managerial position at
middle management level. One of the main tasks of a Supply Chain Manager is the
selection and coordination of suppliers. In order to negotiate better terms with business
partners, it is advantageous to be able to exploit synergies. Negotiation skills and
organizational talent are important traits. English language skills are a basic
requirement. The companies are mostly internationally active. Logistics and transport
companies as well as manufacturing companies may be potential employers.

Speaking of the future: the digitalization of logistics is resulting in the transformation

of traditional job profiles. Nevertheless, the supply chain manager will remain
irreplaceable for the foreseeable future.

Further reasons why you should work in Supply Chain Management? Isn't
that enough? Here are some more useful sources!

1. In "Agile Optimization in Companies" you will learn what the agile optimization of
supply chains can look like and which potentials for success can be exploited if flexible
supply chain management is adopted.

2. Journal of Supply Chain Management: Leading academic journal especially in

Supply Chain Management.

3. Institute for Supply Management: First and largest non-profit supply management
organization worldwide.
OBJECTIVES OF A SUPPLY CHAIN

The objective of every supply chain is to maximise the overall value generated. The value of a supply
chain generates is the difference between what the final product is worth to the customer and the
effort of the supply chain expands in filling the customer’s request. For most commercial supply
chains, the value will be strongly correlated with supply chain profitability, the difference between
the revenue generated from the customer and the overall cost across the supply chain.

For most commercial supply chains, the value will be strongly correlated with supply chain
profitability, the difference between the revenue generated from the customer and the overall cost
across the supply chain.
Having defined the success of a supply chain in terms of supply chain profitability, the next logical
step is to look for sources of revenue and cost. For any supply chain, there is only one source of
revenue: the customer. At Wal-Mart, a customer purchasing detergent is the only one providing
positive cash flow for the supply chain.

All other cash flows are simply fund exchanges that occur within the supply chain given that different
stages have different owners. When Wal-Mart pays its supplier, it is taking a portion of the funds
the customer provides and passing that money on to the supplier. All flows of information, product,
or funds generate costs within the supply chain.

Thus, the appropriate management of these flows is a key to supply chain success. Supply Chain
Management involves the management of flows between and among stages in a supply chain to
maximise total supply chain profitability.

The Importance of Supply Chain Management

It is well known that supply chain management is an integral part of most businesses and is
essential to company success and customer satisfaction.

Boost Customer Service

 Customers expect the correct product assortment and quantity to be delivered.

 Customers expect products to be available at the right location. (i.e., customer
satisfaction diminishes if an auto repair shop does not have the necessary parts in
stock and can’t fix your car for an extra day or two).
  Right Delivery Time – Customers expect products to be delivered on time (i.e.,
customer satisfaction diminishes if pizza delivery is two hours late or Christmas
presents are delivered on December 26).
 Right After Sale Support – Customers expect products to be serviced quickly. (i.e.,
customer satisfaction diminishes when a home furnace stops operating in the winter
and repairs can’t be made for days)

Reduce Operating Costs

 Decreases Purchasing Cost – Retailers depend on supply chains to quickly deliver

expensive products to avoid holding costly inventories in stores any longer than
necessary. For example, electronics stores require fast delivery of 60” flat-panel plasma
HDTV’s to avoid high inventory costs.
 Decreases Production Cost – Manufacturers depend on supply chains to reliably
deliver materials to assembly plants to avoid material shortages that would shutdown
production. For example, an unexpected parts shipment delay that causes an auto
assembly plant shutdown can cost $20,000 per minute and millions of dollars per day in
lost wages.
 Decreases Total Supply Chain Cost – Manufacturers and retailers depend on supply
chain managers to design networks that meet customer service goals at the least total
cost. Efficient supply chains enable a firm to be more competitive in the market place.
For example, Dell’s revolutionary computer supply chain approach involved making
each computer based on a specific customer order, then shipping the computer directly
to the customer. As a result, Dell was able to avoid having large computer inventories
sitting in warehouses and retail stores which saved millions of dollars. Also, Dell
avoided carrying computer inventories that could become technologically obsolete as
computer technology changed rapidly.

Improve Financial Position

 Increases Profit Leverage – Firms value supply chain managers because they help
control and reduce supply chain costs. This can result in dramatic increases in firm
profits. For instance, U.S. consumers eat 2.7 billion packages of cereal annually, so
decreasing U.S. cereal supply chain costs just one cent per cereal box would result in
$13 million dollars saved industry-wide as 13 billion boxes of cereal flowed through the
improved supply chain over a five year period.
 Decreases Fixed Assets – Firms value supply chain managers because they
decrease the use of large fixed assets such as plants, warehouses and transportation
vehicles in the supply chain. If supply chain experts can redesign the network to
 properly serve U.S. customers from six warehouses rather than ten, the firm will avoid
building four very expensive buildings.
 Increases Cash Flow – Firms value supply chain managers because they speed up
product flows to customers. For example, if a firm can make and deliver a product to a
customer in 10 days rather than 70 days, it can invoice the customer 60 days sooner.

Lesser known, is how supply chain management also plays a critical role in society. SCM
knowledge and capabilities can be used to support medical missions, conduct disaster relief
operations, and handle other types of emergencies.

Whether dealing with day-to-day product flows or dealing with an unexpected natural disaster,
supply chain experts roll up their sleeves and get busy. They diagnose problems, creatively
work around disruptions, and figure out how to move essential products to people in need as
efficiently as possible.

Societal Roles of SCM

Ensure Human Survival

 SCM Helps Sustains Human Life – Humans depend on supply chains to deliver basic
necessities such as food and water. Any breakdown of these delivery pipelines quickly
threatens human life. For example, in 2005, Hurricane Katrina flooded New Orleans, LA
leaving the residents without a way to get food or clean water. As a result, a massive
rescue of the inhabitants had to be made. During the first weekend of the rescue effort,
1.9 million meals and 6.7 million liters of water were delivered.

 SCM Improves Human Healthcare – Humans depend on supply chains to deliver

medicines and healthcare. During a medical emergency, supply chain performance can
be the difference between life and death. For example, medical rescue helicopters can
save lives by quickly transporting accident victims to hospitals for emergency medical
treatment. In addition, the medicines and equipment necessary for treatment will be
available at the hospital as a result of excellent supply chain execution

 SCM Protects Humans from Climate Extremes – Humans depend on an energy

supply chain to deliver electrical energy to homes and businesses for light, heat,
refrigeration and air conditioning. Logistical failure (a power blackout) can quickly result
in a threat to human life. For example, during a massive East Coast ice storm in
January 1998, 80,000 miles of electrical power lines fell resulting in no electricity for
3,200,000 Montreal, Quebec residents. Due to extreme cold, 30 died and 25% of all
Quebec residents left home to seek heated shelter. In addition, economic costs
 included $3 billion in lost business, $1 billion in home damage and $1 billion in
government expenditures.

Improve Quality of Life

 Foundation for Economic Growth – Societies with a highly developed supply chain
infrastructure (modern interstate highway system, vast railroad network, numerous
modern ports and airports) are able to exchange many goods between businesses and
consumers quickly and at low cost. As a result, the economy grows. In fact, the one
thing that most poor nations have in common is no or a very poorly developed supply
chain infrastructure.

 Improves Standard of Living – Societies with a highly developed supply chain

infrastructure (modern interstate highway system, vast railroad network, numerous
modern ports and airports) are able to exchange many goods between businesses and
consumers quickly and at low cost. As a result, consumers can afford to buy more
products with their income thereby raising the standard of living in the society. For
instance, it is estimated that supply chain costs make up 20% of a product’s cost in the
U.S. but 40% of a product’s cost in China. If transport damage is added in, these costs
make up 60% of a product’s cost in China. The high Chinese supply chain cost is a
major impediment to improving the standard of living for Chinese citizens.
Consequently, China has embarked on a massive effort to develop its infrastructure.

 Job Creation – Supply chain professionals design and operate all of the supply chains
in a society and manage transportation, warehousing, inventory management,
packaging and logistics information. As a result, there are many jobs in the supply
chain field. For example, in the U.S., logistics activities represent 9.9% of all dollars
spent on goods and services in 2006. This translates into 10,000,000 U.S. logistics
jobs.

 Opportunity to Decrease Pollution – Supply chain activities require packaging and

product transportation. As a by-product of these activities, some unwanted
environmental pollutants such as cardboard waste and carbon dioxide fuel emissions
are generated. For example, paper and paperboard accounted for 34% of U.S. landfill
waste in 2005. Only 50% of the 84 million tons of paper and paperboard waste were
recycled. Also, carbon dioxide emissions from transportation accounted for 33% of total
U.S. CO2 emissions in 2005. As designers of the network, supply chain professionals
are in a key position to develop more sustainable processes and methods.

 Opportunity to Decrease Energy Use – Supply chain activities involve both human
and product transportation. As a by-product of these activities, scarce energy is
 depleted. For example, currently transportation accounts for 30% of world energy use
and 95% of global oil consumption. As designers of the network, supply chain
professionals have the role of developing energy-efficient supply chains that use fewer
resources.

Protect Cultural Freedom and Development

 Defending Human Freedom – Citizens of a country depend on military logistics to

defend their way of life from those who seek to end it. Military logisticians strategically
locate aircraft, ships, tanks, missiles and other weapons in positions that provide
maximum security to soldiers and other citizens. Also, superior logistics performance
yields military victory. For example, the B-2 Stealth Bomber is able to deliver bombs to
target without being detected by enemy radar.

 Protects Delivery of Necessities – Citizens of a country depend on supply chain

managers to design and operate food, medicine and water supply chains that protect
products from tampering. Sophisticated packaging techniques, state of the art
surveillance cameras, global positioning systems and RFID inventory tracking are some
of the methods used to deter terrorists from accessing these vital logistics systems.

STAGES OF SUPPLY CHAIN

Supply chain management encompasses such a wide range of functions that it can seem daunting, even
to the most experienced international businessperson. However, the process can be effectively modelled
by breaking it down into several main strategic areas. One common and very effective model is the
Supply Chain Operations Reference (SCOR) model, developed by the Supply Chain Council to enable
managers to address, improve and communicate supply chain management practices effectively. The
SCOR model runs through five supply chain stages: Plan, Source, Make, Deliver, Return

Stage 1: Plan Planning involves a wide range of activities. Companies must first decide on their
operations strategy. Whether to manufacture a product or component or buy it from a supplier is a
major decision.
Options include: Manufacturing a product component domestically Manufacturing a component in a
foreign market by setting up international production facilities Buying a component from a foreign
supplier Buying a component from a domestic supplier If companies are manufacturing products, they
must decide how they will be produced. Goods can be: Make to stock (produced and stored, awaiting
customer orders); Make to order (constructed in response to a customer order); Configure to order
(partially manufactured the product and completed it after a firm customer order is received); or
Engineer to order (manufactured a product to unique specifications provided by a customer).
Sometimes, goods can be produced by a combination of these methods. Companies must also decide
whether they will outsource manufacturing. This operations planning is essential because these
decisions influence the supply chain. Planning also involves mapping out the network of manufacturing
facilities and warehouses, determining the levels of production and specifying transportation flows
between sites. It also involves assessing how to improve the global supply chain and its management
processes. When planning, companies should ensure that their supply chain management strategies
align to business strategies, that communication plans for the entire supply chain are decided and that
methods of measuring performance and gathering data are established before planning begins.

Stage 2: Source This aspect of supply chain management involves organizing the procurement of raw
materials and components.
When sources have been selected and vetted, companies must negotiate contracts and schedule
deliveries. Supplier performance must be assessed and payments to the suppliers made when
appropriate. In some cases, companies will be working with a network of suppliers. This will involve
working with this network, managing inventory and company assets and ensuring that export and
import requirements are met.

This stage is concerned with scheduling of

STAGE 3: MAKE -
production activities, testing of products, packing and
release. Companies must also manage rules for performance,
data that must be stored, facilities and regulatory
compliance.

STAGE 4: DELIVER- The

delivery stage encompasses all the steps from
processing customer inquiries to selecting distribution
strategies and transportation options. Companies must also
manage warehousing and inventory or pay for a service
provider to manage these tasks for them. The delivery stage
includes any trial period or warranty period, customers or
retail sites must be invoiced and payments received, and
companies must manage import and export requirements for the
finished product.

STAGE 5: RETURN - Return is associated with managing all

returns of defective products, including identifying the
product condition, authorizing returns, scheduling product
shipments, replacing defective products and providing
refunds. Returns also include “END OF LIFE” products (those
that are in the end of their product lifetime and a vendor
will no longer be marketing, selling, or promoting a
particular product and may also be limiting or ending support
for the product).
Companies must establish rules for the following:
Product returns
Monitoring performance and costs
Managing inventory of returned product

What then is Supply Chain Management? SCM as it is popularly

referred to is all about planning and management of activities involved in
sourcing and conversions. It also includes coordination and collaboration
with channel patterns which can be suppliers, intermediaries, third party
service provider and customers. There are different aspects and stages in
supply chain management. Some of the keys aspects are mentioned
below:

Raw Material Suppliers: A supplier plays a critical link in supply chain.

Forming the right partnership with right terms and polices helps
develop a good relationship with the suppliers that will prove beneficial
to all the parties involved.
Manufacturer: After acquiring the right raw material, the organization
has to make careful decision on the manufacturing of the product. The
demand for the product, technologies required and other important
decisions have to be carefully managed at this stage.
Distributors: The distributors could include wholesalers and retailers.
They are one of the important links between the organization and
customers.
Customers: They are the most important and also the end-link in the
chain. An organization should identify their customers and make sure
that the product they produce is what is required.
Beside the above, Logistics is also an important factor in the supply
chain management. Logistics is to plan, execute and control various
aspects of supply chain, from the point of origin to the point of
consumption. For an organization to operate smoothly and profitable it
is necessary for the supply chain to keep running.

However, redundancy is the enemy of efficiency. So how does one build

a supply chain network that responds efficiently? The answer is the
‘people’ factor. “The flexibility of a supply chain and its ability to respond
to different demand patterns is a direct result of the network design.
However, the efficiency of a supply chain and the speed of response
depends more on the people that run the supply chain.”

SOME OF THE KEY BENEFITS OF SUPPLY CHANGE MANAGEMENT

 Learn to design supply chains that improve supply chain profitability
 Use product design, strategic sourcing, and pricing to most efficiently
match supply and demand
 Build and maximize supply chain coordination and collaboration
 Identify supply chain risks and design risk mitigation strategies
 Explore purchasing, production, and distribution strategies for a
global environment
There are four stages to the evolution of such a supply chain network:

Stage 1: Supply Management. The most basic stage, built around

an internal MRP system that is lead-time driven. It includes tier-one
suppliers only. Most planned vendor interaction is through
documentation and seldom involves status reporting.
Communications are transactional and include quoting, purchase
orders, and releases.

Stage 2: Supply Chain Management. This stage is characterized by

an increased scope and includes tier-two suppliers and beyond. There is also increased
interest in status reporting, some data sharing among participants, and generally more
complex interrelationships. Communications are transactional with the addition of data
flow.

Stage 3: Supply Chain Integration. Includes programs that benefit all members of the
chain. It elevates supply to collaborative involvement among the members, including
strategic planning and risk sharing. Communications at this level go well beyond
transactions and data and include information of all types.

Stage 4: Demand-Supply Network Collaboration. Cooperative interaction and proactive

behavior based on critical information that flows freely and simultaneously throughout
the supply network. It is sometimes referred to as the glass pipe. I know of no examples
of this stage in the electronics industry.

Any supply chain will perform at the level of its least developed participants. These
companies, without the ability or perhaps willingness to develop channel-compatible
supply chain strategies, are bottlenecks and compensating for them has significant cost
to the channel in terms of the misuse of resources.

Stage 1: Unmanaged, or Managed by Others

In this stage, functions and firms operate independently. They often lack planning and control activities.
Unless they are subcontractors for and are managed by others, these firms often have inefficient and
costly operations. The overriding strategy is survival. Management is blind to opportunities and threats.
Obviously, firms in this stage are competitively and financially vulnerable.

Stage 2: A Low-Cost Production

 Firms in this stage are likely to produce commodity-like consumer products or specialized industrial
products; some predictability of demand allows the focus to be on manufacturing excellence. Production-
driven synchronization of buying and selling activities prevails. Innovation and customer service are
subordinate to standardization and cost control. Logistics activities, inventory management, warehousing
and transportation, are suboptimized. Supplier relationships are constantly changing.

Stage 3: Project/Initiative Driven

A series of projects drive incremental internal improvements. Management is primarily results, not
process, driven. Alignment and focus are concentrated on achieving short-term goals. An alphabet soup
of initiatives may exist simultaneously, such as EDI, TQM, ECR, VMI, MRP, DRP, and ERP. While
planning and control systems do exist, the focus is on tactical goals and not on strategic opportunities.
Limited coordination with trading partners is found in this stage.

Stage 4: Partner Driven

This stage involves an investment in and responsiveness to meeting key customer, supplier, or third-
party logistics requirements. Management sees growth from innovation, services, and speed, in response
to customer or supplier requirements. Internal cooperation and a shared focus are driven by the external
trading partner. Planning is tied to long-term trading partner needs. Close ties are found with a few key
trading partners.

Stage 5: Balanced Internally

Management sees the potential strategic benefits from SCM, and is now focused on market-driven,
not production-driven, synchronization. Internal physical and informational flows are integrated. With
adequate planning and control systems, significant internal coordination considers the total system of
inputs, processes, and outputs. A just-in-time and a make-to-order philosophy is possible due to effective
coordination with key immediate customers and suppliers. This stage would be highly desirable for most
organizations.

Stage 6: Extended Integration

Management now has a strategic and systemic orientation that drives integration from the customer's
customer to the supplier's supplier. The whole organization is actively collaborating with outside trading
partners. There is extensive asset and resource sharing between firms. Trust and reciprocity exists with
trading partners. Relational, technological, and economic embeddedness provide competitive advantage.
More control exists with less ownership. Asset ownership will shift to the firms with the lowest cost of
capital. This stage manifests a true SCO in that it is a multifirm system. Multifirm governance structures
are established.

Stage 7: Real-Time Connectivity

This stage is mainly aspirational, although the enabling technologies exist today. It is characterized by
real-time informational connectivity

Figure 9.6. Characteristics and Strategies of Supply Chain Stages

 Supply Characteristics of Relationships Strategies for Firms to Employ to
Chain Stage Between Firms within This Stage Achieve This Stage

1.
Unmanaged or Subcontractor for another firm. Adherence Opportunistic, temporary relationships. Low
Managed by to requirements. No value engineering. cost, or responsive.
Others

Internally focused.
2. Production Legitimacy, survival. Building correct scale.
Focused Efficiency.
Optimize manufacturing operations.

3. Project Change through piecemeal initiatives. Successive suboptimizations of parts of the

Driven Senior functional management sponsor. whole system. Incremental changes.

4. Partner Responding to important partner. Short- Compliance for survival and growth. Shared
Driven term changes for long-term gains. goals, costs, and benefits.

Extensive internal coordination. Elimination

Synchronization of inputs and outputs -a
of counterproductive behaviors and reward
5. Balanced process approach. Just-in-time philosophy.
systems. Emphasis on flows, not stocks.
Internally Strategic, systemic orientation. Coordination
Information sharing with trading partners.
with immediate customers and/or suppliers.
Make-to-order.

6. Extended Multifirm trust and cooperation. Shared Integration with supply chain flows beyond
Integration resources, costs and benefits. immediate customers and suppliers.

Information, connectivity and

7. Virtual Real-time, seamless connectivity. Web-

responsiveness.
Network based and hollow corporations.

Minimum asset investments.

and pipeline visibility for all members of this supply chain. A high level of postponement and
customization exists. The focus is on innovation, speed, and flexibility. Enterprise boundaries are blurred.
Shared control and success is achieved through connectivity, shared knowledge, and forged capabilities.
Both market-driving and market-creation opportunities abound. The supply chain strategies just described
are summarized in Figure 9.6.
 PLAN – Planning is the strategic part of the supply chain management process, to find
out the best possible blueprint of how to fulfill the end requirement. SCM managers
should identify a list of key components like plant location & size, warehouse designing,
delivery models, IT solutions’ selection, etc. Not only this, the supply chain
management process would be incomplete if key matrices like transportation cost
modeling, warehouse efficiency models, etc. are not developed.
 SOURCE – At this stage of supply chain management, the emphasis is on to ascertain
the most reliable of suppliers for raw materials so that the production process would
never jeopardize. But challenging conditions do arise during operations, supply chain
managers must ensure key pain points of supply cycle are always being tracked to
keep the engine running. Holisol believes that contractual framework as well as a
selection of a capable supplier is one thing, but there should be a tangible system in
place for the continuous development of suppliers which would boost their efficiency as
well.
 EXECUTE – This is the stage where well-designed processes are implemented so that
a perceivable shape is given to existing plans in the form of manufactured products
which are ready for testing, packaging, and delivery. Not only this, results at this stage
are quantified so that maximum possible efficiency is achieved. Holisol’s specialists
design cost-effective IT solutions which enable customers in building excellence and
improving efficiency at the execution stage of the supply chain management process.
 DELIVER – Supply chain when reaches this stage, the managers have a task at hand
to deliver the product/service in the right quantity, at the right place and right time by
employing suitable carriers. Supply chain managers should be fully equipped with
modern IT tools to keep a track on warehousing networks, inventory models as well as
invoicing and payment receipts.
 RETURN – Returns’ handling is the last step of the supply chain management process.
It not only involves reviewing returned products for quality purposes but also managing
their inventory. At the ground level, supply chain managers should deploy their
resources supporting them with technology for faster pickups, quicker replacements,
etc. Returns management should be a value enhancement measure in the eyes of
supply chain managers and they must ensure every desirable measure is taken for
maximum possible efficiency.
The supply chain process occurs in two ways, Cycle View and Push/Pull view. The processes in
a supply chain are divided into a series of cycle, each performed at the interface between two
successive stages of a supply chain. Cycle view of Supply chain process includes, Customer
order cycle.

CYCLE VIEW OF SUPPLY CHAIN PROCESS

Five stages of supply chain processes represent four process cycles
Customer order cycle
Replenishment cycle
Manufacturing cycle
Procurement cycle
Each cycle occurs between two successive stages of the supply chain
Number of cycles depend on the number of stages in the supply chain
Grocery supply chain has all four cycles separated
Dell sells directly to customers, hence only two cycles
Sub-processes in each Supply Chain Process Cycle
Each cycle consists of six sub-processes
Supplier stage markets product
Buyer stage places order
Supplier stage receives order
Supplier stage supplies order
Buyer stage receives supply
Buyer returns reverse flows to supplier or third party
Depending on the transaction the sub-processes can be applied to the appropriate cycle, for
example
Customer buying online from Amazon: Customer order cycle
Amazon ordering books from distributor: Replenishment cycle
2. Push/ Pull view
The processes in a supply chain are dividing into two
categories depending on whether they are executed in response
to a customer order or in anticipation of customer orders.
Pull process are initiated by a customer order, whereas push
process are initiated and performed in anticipation of
customer orders.

Supply chains are growing in complexity every second. We will

try and shed a light on some of the most notable challenges,
that Supply Chain Management is facing right now and suggest
a way to solve these challenges.

1. Consumers expecting a fast delivery and a reasonable price

Companies are outsourcing their supply chain in order to
accommodate the consumers price expectations. But global
suppliers often equals extended delivery times, so while it
might result in a more cost efficient supply chain, it can
also have the consequence that the consumers expectations of
a fast delivery, are difficult to meet.

2. Global suppliers can result in a loss of control

Extended delivery times can result in a lower level of
control. Companies relying on global suppliers often does
not possess the same amount of overview. A high level of
precision is also essential when it comes to consumer
satisfaction and if you outsource parts of the supply chain,
the risk of error could increase.

3. The expectation of innovation

Products have a shorter life cycle, because the demands of
the market are constantly changing, and the consumers expect
continuous innovation. If product features have to be
improved, it often takes a restructuring of the company’s
supply chain, which is a more complex task, if parts of the
supply chain have been outsourced.
A unified and automated supply chain
We believe that companies can achieve significant advantages
by insourcing or maintaining the entire supply chain in their
home country. In order to create an efficient supply chain
without outsourcing, we suggest establishing a supply chain
were flexible and innovative automatization constitutes the
essential core.

LOGISTICS AND SCM

Logistics management is that part of supply chain management that

plans, implements, and controls the efficient, effective forward and
reverses flow and storage of goods, services and related information
between the point of origin and the point of consumption in order
to meet customers' requirements.

Logistics is generally seen as a differentiator in terms of the final

bottom line of a typical “hard and tangible goods” organization;
enabling either a lower cost or providing higher value.

While a lower cost is mostly a one-time feel good factor and has
been the traditional focus area in logistics, high value comes into
the picture much later and may be tangible or intangible in a good’s
initial stages.

So while an organization like Zappos may look costly at a first

glance, the extraordinary customer service due to robust policies
is a value which more than offsets the slightly higher cost.

Logistics is concerned with both materials flow and information flow.

While the materials flow from the supplier to consumer, the
information flows the other way round. It is not only concerned with
inventory and resource utilization, customer response also falls
under the ambit of logistics.
In simple terms, logistics can be seen as a link between the
manufacturing and marketing operations of a company. The traditional
organizations used to think of them separately, but there is a
definite value addition in integrating the two due to the
interdependence and feedback channel between the two.

The level of coordination required to minimize the overall cost for

the end consumer gets tougher to achieve as the number of
participants in a supply chain increase, as an extremely efficient
flow of material and information is required for optimization.

Logistics cover the following broad functional areas: network

design, transportation and inventory management.

Manufacturing plants, warehouses, stores etc. are all facilities

which form key components in the network design. Transportation: the
cost and consistency (reliability) required out of the
transportation network determines the type and mode of the movement
of goods and also affects the inventory.

Buffer (or safety) stock is the reserve stock held to safeguard

against shortages or unexpected surge in demand, to avoid “stock-
outs”. Fewer inventories with negligible stock-outs — the hallmark
of an efficient logistical system.

Basic concepts of Logistics and SCM

Inventory Planning
Organizations want to minimize the inventory levels due to its almost
linear relationship with the cost. Yet if the demand is forecasted
accurately, there would ideally be no need for inventory and the
goods will move seamlessly from warehouses to customers.

o That would have been awesome, but it is deep into the ideal world
zone. In the real world, the forecasted numbers can only take you
so far and some inventory has to be maintained to satiate any surges
in demand; the cost of unhappy consumers who are not serviced is
often huge, and is immeasurable in most cases.
o Yet overstocks lead to increase in working capital requirements,
insurance costs and blocked resources which could have been
productive someplace else.

o Making a business forecast has largely been a gut-based process,

but is changing rapidly in the era of data-based decision making.
The forecast depends on the historical baseline for sales,
seasonality (soft drinks have higher sales volume in May), recent
trends (Samsung is losing out to competitors when it comes to phones,
a declining trend), business cycles (economies go through expansion
and contraction every few years), promotional offers (up to 50% off
can drive the average fashionista mad) etc.

Transportation
The kind of transportation employed by an organization is a strategic
decision (it usually accounts for around 1/3rd of the total logistics
cost) based on the required level of risk exposure, customer service
profiles, geographic area covered etc. Truck shipments take more
time for delivery compared to air transport (customers with relaxed
turnaround times); is cheaper but necessitates maintenance of higher
inventory levels.

o Transportation serves the purpose of not just product movement,

but storage as well (not very intuitive). Time spent for delivery
means saved time for warehousing, and many times the cost to offload
and reload shipments can be greater than the cost of letting the
goods stay in the transportation vehicles itself.

o Two basic thumb rules apply for transportation decisions: truck

load (TL) shipments are better than less-than-truckload (LTL)
shipments as storage space is a perishable commodity (just like a
commercial airline does not want to fly with empty seats), and the
cost per kilometer decreases as the distance increases (two 500 km
shipments is usually more expensive than a single 1000 km shipment).

o The factors which determine the economies of transportation

decisions include but are not limited to: distance between the
starting and destination points, and density (higher density
products take less space — space constraints outweigh weight
constraints by a huge margin), stow ability (spherical packaging
will lead to more empty spaces compared to cubical) and volume of
the goods. Different modes of transport serve different strategic
ends (rail, road, air, water etc).

o FlipKart has eKart for its logistical operations and warehousing,

whereas smaller e-commerce players generally outsource their
operations to specialized logistics players such BlueDart, DHL and
now Delhivery.

Packaging
The end goals differ: can either be done for end consumers or for
logistical considerations. The packaging will then depend on the end
goal; form factor plays the lead role when packaging goods for the
end consumers, while function plays the lead role in packaging for
logistical operations.

Warehousing
It is the back-end building for storing goods. Based on the needs
of the organization, it can be in-house or outsourced.

o Primary functions of a warehouse are product movement and

storage. Activities such as offloading of the goods coming from the
suppliers, the intermediate packaging (if required), and shipping to
other destinations (retailers or end consumers) are handled in the
warehouse. Similarly, they can also serve as a storage house for
handing peak consumer demand to avoid stock out of items, and acts
as a buffer between the starting point (usually manufacturing plant)
and ending point (think about a typical retail outlet).

o Different distribution strategies can be adopted by an

organization based on its needs and infrastructure in place, namely:

Cross-Docking: Relies on minimal processing at the warehouse level

and facilitate seamless connection between “incoming” and “outgoing”
goods through technologies such as bar code scanners; becoming
increasingly important due to established structured communication
between retailers and manufacturers; best for high velocity goods
with predictable demand patterns.
Milk Runs: The delivery guy is out to deliver items from a single
supplier to multiple retailers or to pick up items from multiple
suppliers for a single retailer (An Indian Doodhwala can literally
teach a thing or two about this, hence the naming we think).
Direct Shipping: A supplier directly ships to a particular retailer
without any intermediaries. Mostly happens with big-name stores with
huge good volumes, and very frequent replenishments. Big savings on
time.
Hub and Spoke Model: Hub serves as the central node for nearby
places, and the spokes depend on the hub for their needs (think of
a metropolitan and various tier-2 cities in its proximity).
Pooled Distribution: Region is the most important factor driving
this strategy. Delivers to every destination point in a geographical
area, smart for handling peak time loads and LTL shipments. Plus one
for the planet as a bonus!

Human : Arteries :: Logistics : Information

Traditional paper-based information systems are increasingly on
their way out, and electronic exchanges are making rapid inroads
into the logistical process flow. The initial investment in
electronic systems is recouped quickly by cost savings due to better
operational efficiency and enhanced customer service. Advances in
electronic data interchange (EDI), artificial intelligence and
wireless communication is partly responsible for this intelligent
shift.

The principal information flow can be subdivided in two main streams:

one for planning (looking into the future) and the other for
operational flows (in the past and present). Plans are to be made
for production, storage and movement of goods. Manufacturing
constraints (internal) and expected sales (external) are the key
areas focused upon. Operating flows refer to the information
generated (or required) to serve the orders to the customer.
Enterprise Resource Planning (ERP) is a fancy term used by IT people
for one-stop, integrated packages to support multiple functions
across an organization. It serves as a central destination to capture
data which aids in making optimal decisions, while also serving as
a repository to better understand the current business scenario and
plan for any future needs.
Green Supply Chain Management: Lean Practices
Green is the new way to go about things, and the myth that profits
and environment cannot go hand in hand is evaporating fast.
Commitment to lean practices is a promise to do away with
inefficiencies in the system to reduce wastes and have a minimal
impact on the environment.

The emphasis on continuous product flows, standardization within the

organization/industries and a greater integration between producers
and consumers — all these have contributed to efficient supply chains
with gradually decreasing waste levels.

Information is often the key differentiator when it comes to

successful supply chain practices, and the organizations that share
information with each other based on the premise of trust and long-
term business viability will often have decisive competitive
advantage over organizations that do not share critical information
upstream and downstream.

The best part is everybody winning — organizations, end consumers

and Mother Nature.

Supply Chain Management Courses and Jobs

Many top global schools (MIT, Purdue, Rotterdam etc.) have dedicated
courses running from a long stretch of time. Certifications like
APICS, ISM and IOSM can also prove beneficial if one is constrained
by time and/or money.

In India, IIM Bangalore offers specialized courses for theoretical

and applied research in the field. Institutes like IIM C, XLRI, NITIE
and IIMM (Indian Institute of Materials Management) also offer
relevant courses for folks geared towards SCM.

According to PayScale, the median salary of a Supply Chain Manager

in India is around 8.3 LPA. Some of the industries that are in
perennial need of SCM professionals are: manufacturing, automotive,
retail, construction and services (IT/Consulting).
SCM as a career choice gives you ample opportunities to tackle
challenging problems while also giving you insights about the
business that very few roles can afford to (case in point: Tim Cook,
the CEO of Apple, is a supply chain specialist).

If you aspire to be a global citizen in a world that is becoming

increasingly smaller, it can give your career a big boost.

What is Logistics and Supply Chain Management?

"Logistics typically refers to activities that occur within the boundaries of a single organization
and Supply Chain refers to networks of companies that work together and coordinate their actions
to deliver a product to market. Also, traditional logistics focuses its attention on activities such as
procurement, distribution, maintenance, and inventory management. Supply Chain Management
(SCM) acknowledges all of traditional logistics and also includes activities such as marketing, new
product development, finance, and customer service" - Michael Hugos

What is Logistics?
"Logistics is about getting the right product, to the right customer, in the right quantity, in the right
condition, at the right place, at the right time, and at the right cost (the 7 Rs)" - John J. Coyle et al

In the past, various tasks were under different departments, but now they are under the same
department and report to the same head as below,

What is Logistics Management?

"Logistics Management deals with the efficient and effective management of day-to-day activity in
producing the company's finished goods and services" - Paul Schönsleben
What is the Difference Between Inbound Logistics and Outbound Logistics?
"Inbound Logistics refers to movement of goods and raw materials from suppliers to your
company. In contrast, Outbound Logistics refers to movement of finished goods from your
company to customers"

To illustrate this term, we make a small graphic as below,

As you can see, purchasing and warehouse (distribution center) communicates with suppliers and
sometimes called "supplier facing function". Production planning and inventory control function is
the center point of this chart. Customer service and transport function communicates with
customers and sometimes called "customer-facing functions.

What are the Transport and Logistics?

"Transport and Logistics refers to 2 types of activities, namely, traditional services such as
air/sea/land transportation, warehousing, customs clearance and value-added services which
including information technology and consulting"
What is International Logistics?
These are one of the most ambiguous groups of terms in international business out there. They are
used interchangeably with international supply chain or international production and transportation
activities. However, the most concise definition is as below,
"International Logistics focuses on how to manage and control overseas activities effectively as a
single business unit. Therefore, companies should try to harness the value of overseas product,
services, marketing, R&D and turn them into competitive advantage"

What is Third Party Logistics or 3PL?

The concept of 3PL appeared on the scene in the 1980s as the way to reduce costs and improve
services which can be defined as below,
"Third Party Logistics or 3PL refers to the outsourcing of activities, ranging from a specific task,
such as trucking or marine cargo transport to broader activities serving the whole supply chain
such as inventory management, order processing and consulting."

In the past, many 3PL providers didn't have adequate expertise to operate in complex supply chain
structure and process. The result was the inception of another concept.

What is Fourth Party Logistics or 4PL?

The 4PL is the concept proposed by Accenture Ltd in 1996 and it was defined as below,
"Fourth Party Logistics or 4PL refers to a party who works on behalf of the client to do contract
negotiations and management of performance of 3PL providers, including the design of the whole
supply chain network and control of day-to-day operations"

You may wonder if a 4PL provider is really needed. According to the research by Nezar Al-Mugren
from the University of Wisconsin-Stout, the top 3 reasons why customers would like to use 4PL
providers are as below,

- Lack of technology to integrate supply chain processes

- The increase in operating complexities

- The sharp increase of the operations in the global supply chains

What is Supply Chain?

"Supply Chain is the network of organizations that are involved, through upstream and downstream
linkages, in the different processes and activities that produce value in the form of products and
services in the hands of the ultimate consumer" - Martin Christopher

What is Supply Chain Management?

Each researcher defines supply chain management differently. However, we would like to provide the
simple definition as below,
"Supply Chain Management (SCM) refers to the coordination of production, inventory, location,
and transportation among the participants in a supply chain to achieve the best mix of
responsiveness and efficiency for the market being served" -Michael Hugos
What is Supply Chain Network?
Many companies have the department that controls supply chain activity so they believe that SCM
is a "function". Some companies think SCM is a kind of management system under IT (information
system or enterprise resource planning.) In fact, SCM is actually a "network" consists of many
players as below,

A generic supply chain structure is as simple as Supplier, Manufacturer, Wholesaler and Retailer
(it's more complex in the real world but a simple illustration serves the purpose.)

The word "management" can be explained briefly as "planning, implementing, controlling". Supply
Chain Management (in supply chain education context) is then the planning, implementing and
controlling the networks.

What is Information Sharing?

Another important attribute of supply chain management is the flow of material, information, and
finance (these are thing that can be found in lean manufacturing project too). Even though there
are 3 types of flow, the most important one is information flow aka information sharing. Let's see
the example of this through the simplified version of the bullwhip effect as below,
When customer demand data is not shared, each player in the same supply chain must make
some sort of speculation and this can become the management issues. According to the above
graphic, the retailer has a demand for 100 units, but each player tends to keep stock more and
more at every step of the way. This results in higher costs for everyone in the same supply chain.

When information is shared via demand management from retailer down to supplier, everyone
doesn't have to keep stock that much. The result is a lower cost for everyone. This is sometimes
called the extended supply chain or supply chain visibility.

Information sharing will also reduce the needs to use the digital transformation solution such as
supply chains systems, digital supply chain, predictive analytics or artificial intelligence.
What is Supply Chain Coordination?
Information sharing requires a certain degree of "coordination" (it's also referred to as collaboration
or integration in scholarly articles). Do you wonder when people started working together as a
network? In 1984, companies in the apparel business worked together to reduce overall lead-time.
In 1995, companies in the automotive industry used Electronic Data Interchange to share
information. So, working as a "chain" is the real-world practice.

What are Conflicting Objectives?

Working as a network requires the same objective, but this is often not the case (even with
someone in the same company). "Conflicting Objectives" is the term used to describe the situation
when each function wants something that won't go well together. For example, purchasing people
always place the orders to the cheapest vendors (with a very long lead-time) but production people
or project manager need material more quickly.

To avoid conflicting objectives, you need to decide if you want to adopt a time-based strategy, low-
cost strategy or differentiation strategy. A clear direction is needed so people can make the
decisions accordingly.

What is the Cost/Service Trade-off?

The concept of Cost/Service Trade-off appeared as early as in 1985 but it seems that people really
don't get it.

When you want to improve service, the cost goes up. When you want to cut cost, service suffers.
It's like a "seesaw", the best way you can do is to try to balance both sides.

Real-world example is that a "new boss" ask you to cut costs by 10%, improve service level by
15%, double inventory turns so the financial statement looks good. If you really understand the
cost/service trade-off concept, you will agree that you can't win them all. The most appropriate way
to handle this is to prioritize your KPIs.

What is Supply Chain Relationship?

To work as the same team, long-term relationship is key. Otherwise, you're just a separate
company with a different strategy/agenda. So academia keeps preaching about the importance of
relationship-building but is not for everyone.
Since there are too many suppliers to deal with, a portfolio matrix is often used to prioritize the
relationship-building to create supply chain partners. Focus your time and energy to create a long-
term relationship with suppliers of key products and items with limited sources of supply (or items
with high supply chain risk.) Because people and human resource are the factors that can make or
break your supply chain.

Drivers and Obstacles in Supply Chain Management

Facilities, inventory, transportation and information are the four major drivers of the supply
chain. The performance of any supply chain can be measured on the basis of the drivers
that run it.

Role played by major drivers in achieving a strategic fit

We know that in order to achieve a strategic fit, a company needs to balance its efficiency
with responsiveness in its supply chain so as to suit its competitive strategy. Thus, in order
to keep a check on this balance, a company needs to analyse the performance of the
drivers of its supply chain i.e. the facilities, inventory, transportation and information, as
this would also help the company to know how and when it has achieved the strategic fit.

Major drivers of any supply chain

 Facilities (for example, Production unit)

 Inventories (for example, Stock of goods)
 Transportation (for example. Modes and Routes)
 Information (for example, Customer demand
Decision making in a Supply Chain
In order to take a decision in a supply chain, we need to have a framework within which
the supply chain needs to exercise itself in order to achieve a strategic fit. This framework
can be called ‘the supply chain decision making framework’.

The above supply chain decision making framework depicts a framework for structuring
the drivers. From the first unit onwards it has been our endeavour to ieam how a company
needs to act in order to achieve a strategic fit along with its competitive strategy. Later, we
learnt that this can be achieved by keeping a balance between two major essentials which
are responsiveness and efficiency. To achieve this goal the company utilises the above
four major drivers. After exercising these drivers with respect to responsiveness and
efficiency, the combined effect of these drivers together help in determining the supply
chain responsiveness and efficiency.

Moreover, we are going to study in detail the different decisions that a supply chain
manager needs to take with respect to each driver. Thus we shall stress on,

 Role played by a driver in the supply chain: Facilities can be defined as the location to or
from which inventory transported .It is within a facility that the inventory is either
transformed into another state or manufactured. Also, it is the location where goods are
stored (warehousing) before being shipped to the next stage.
 Role played by a driver in competitive strategy: The facilities should be flexible. It is this
flexibility in terms of its capacity to perform functions that is the key driver of supply chain
performance in terms of responsiveness and efficiency. For example, if a company
increases its capacity of production, and produces a greater quantity in a single location,
then it can achieve economies of scale and thereby increase its efficiency both in terms
of quantity produces and costs. However, it is known that responsiveness comes at a
cost.
 Components of decision making: The components of facilities decisions are nothing but
factors that must be analysed by a company before coming up with a facility. The
following factors should be kept in mind and analysed by a company before coming up
with a facility,

1. Location
2. Capacity
3. Operations methodology
4. Warehousing methodology

Inventory Management
We are going to study the role that inventory plays in supply chain and how the managers
use inventory to drive the supply chain. Existence of inventory is because of the mismatch
between the supply and demand. Such a mismatch exists in industries where it is
economical for them to produce in lots or where companies need to stock goods in
anticipation of future demand. Inventory is important because it can readily satisfy the
demand of the customers by having the product ready.

Role played by inventories in the competitive strategy

The inventory plays a significant role in a supply chain’s ability to perform well. It helps a
company to be responsive or efficient. If a company possesses a competitive strategy to
be more responsive then it can locate its inventories close to its customers.

Component of inventory decisions

1. Cycle inventory
2. Safety inventory
3. Seasonal inventory
4. Sourcing

Problems faced by a facilities manager

The basic problems that managers come across while making decisions is between the
cost of the number, location and type of facilities and the level of responsiveness that
these facilities provide the company’s customers.

Transportation
Role of transportation in the supply chain

Transportation moves a product between different stages in a supply chain, and has a
great impact on the efficiency and responsiveness of a supply chain. Quick transportation
of goods through various modes or different quantities increases the responsiveness
however lowers the efficiency.

Role of transportation in competitive strategy

The role played by transportation in a company’s competitive strategy comes into effect
prominently when the company considers the targeted customer’s demands. If a
company’s competitive strategy is to be more responsive to its customer’s and if the
customer’s are willing to pay for it, then the company needs to be highly responsive.

The role played by transportation in a company’s competitive strategy comes into effect
prominently when the company considers the targeted customer’s demands. If a
company’s competitive strategy is to be more responsive to its customer’s and if the
customer’s are willing to pay for it, then the company needs to be highly responsive.

Components of transportation decisions

 Mode of Transportation
 Selection of routes and network
 In house or outsourcing

Information
Role played by information in a supply chain

Information has no physical presence, unlike facilities, transportation and inventory. It has
no physical presence, and yet this driver plays an important role in the supply chain and
thus its value to the supply chain must not be underestimated.

The information as a driver of the supply chain plays a very important role in the proper
functioning of the supply chain and this can be explained with the help of the following
reasons:

 Information is collected at each and every stage of the supply chain, this information is
very vital as it helps the supply chain to rectify itself at any of the stages and helps the
supply chain to reconfigure itself, thereby maximising the supply chain profitability.
 The day-to-day operation of any facility requires proper analysis of the information
available so that production schedules can be made. The information that is available
helps the company to produce on time, maintain a good inventory and also provide.

Role played by information in the competitive strategy

Information, as a driver has much importance in companies nowadays. This is because it

is the information that a company has, that helps it to decide whether or not a company
needs to be more responsive or efficient and thereby have a profitable supply chain.
Information is an important driver as it helps to reduce costs and improve responsiveness
within a supply chain.

Components information decisions

The key components of information as a driver of supply chain, which have to be analysed
by managers thoroughly before taking any decision. These components are as follows,

1. Push versus pull

2. Forecasting & proper planning
3. Information sharing & co-ordination
 4. Pricing & managing revenue
5. Technology

Obstacles in Strategic Fit Achievement

In order to achieve a strategic fit, a company needs to strike a balance between efficiency
and responsiveness. In its endeavour to achieve this strategic fit, the company needs to
understand what the customer wants, on the basis of which the company should place
itself on the responsiveness spectrum.

The obstacles are becoming dynamic creating more difficulties for companies to create a
proper balance. On the other hand they have also helped the companies with increased
opportunities to improve on the supply chain management. Thus, managers have to play a
very important role in tackling these obstacles in order to turn it to an advantage and in
turn increase the profitability of their supply chain. Obstacles can be of various types some
of which are as under:

 Increase in product variety: The demand of customers has been continuously increasing.
There has been a continuous increase in the demand for customised products.
 Increase in demanding customers: ‘Customer is King’ in today’s world. There has been
an increase in the number of customers who constantly demand improved services like
timely delivery, cost, product performance, discounts and shorter lead times.
 Smaller product lifecycles: With the increase in the number and types of products
demanded, there has been a decrease in the life cycles of a large number of products.
Today, there are products whose lifecycles can be measured in terms of months, like
mobile phones and computers unlike products that would remain in the market for years
and years.
 Effect of globalisation: The removal of trade restrictions by various governments has
enabled increased Global Trade. The effects of globalisation on supply chains have been
tremendous and have also provided supply chains a broader environment to work in.
Firstly, globalisation
 Difficulty in execution of strategies: The creation of a successful supply chain strategy is
not very easy. The formulation of the strategy may be easy; however the execution of
this strategy is most difficult. The successful execution of a supply chain strategy involves
the skillful ability of employees and managers at each and every level of the organisation.

It is observed that these obstacles make it more difficult for any company to achieve a
strategic fit by creating a balance between responsiveness and efficiency in the supply
chain.
WHAT IS SUPPLY CHAIN MANAGEMENT STRATEGY?
Supply chain management (SCM) involves the movement of products and services from suppliers to
distributors. SCM involves the flow of information and products between and among supply chain
stages to maximize profitability.
The major functions involved in SCM are the procurement of raw materials, product development,
marketing, operations, distribution, finance, and customer services. Customers are an integral part of
SCM.
The objective of supply network or SCM is to maximize the overall value. Value is correlated to supply
chain profitability. Here, profitability is the difference between the total revenue generated from the
customer and the overall supply chain costs.
Strategies and designing of the supply chain include:

 Deciding on the supply chain structure and the activities each stage of the supply chain will
perform
 Selecting a location and capacities of facility
 Deciding on the products that are to be made and the location where they need to be stored
 Choosing the modes of transportation and the source from where the information is to be
collected

Supply chain design decisions are long term projects and are expensive to reverse; so the manager
must take into account the market uncertainty.

All three strategies are linked and dependent.

Business strategy:
A plan for choosing how to compete. Three generic business strategies
are:

Least cost.
Differentiation.
Focus.
Organizational Strategy:
The strategy of an enterprise identifies how a company will function
in its environment. This supply chain strategy specifies how to
satisfy customers, how to grow the business, how to compete in its
environment, how to manage the organization and develop capabilities
within the business, and how to achieve financial objectives.

Prior to discussing organizational and supply chain strategy in more

detail, the first topic in the section addresses business strategy
and competitive advantages. Competitive advantages are closely
related to business strategy because they outline the advantages the
organization should realize once it has decided how it will compete.
Other concepts covered in this section includes:

Organizational and supply chain strategy.

Prioritization options.
Organizational capabilities.
Alignment of capabilities and strategy.
Resolving misalignment or gaps.
Strategic Supply Chain Management:
Business Strategy:
Typically a business strategy among supply chain strategies will
outline how to grow the business, how to distinguish the business
from the competition and outperform them, how to achieve superior
levels of financial and market performance, and how to create or
maintain a sustainable competitive edge. As per the definition
provided previously, business strategies include least cost,
differentiation, and focus. Least cost relates to a lower cost than
the competition for an otherwise equivalent product or service.
Differentiation relates to a product or service with more features,
options, or models than the competition. Focus relates to whether
the product or service is designed for a broad audience or a well-
defined market segment or segments. There are many ways that these
generic strategies can be combined or made into hybrids. For example,
common business strategies that are generic to many industries and
manufacturers include the following variations:

Best cost—creates a hybrid, low-cost approach for providing a

differentiated product or service.
Low cost—focuses on delivering low price and no-frills basics with
prices that are hard to match.
Broad differentiation—creates product and service attributes that
appeal to many buyers looking for variety of goods.
Focused differentiation—develops unique strategies for target market
niches to meet unique buyer needs.
Focused low cost - designed to meet well-defined buyer needs at a
low cost.
Competitive Advantages:
Competitive advantages mirror the strategies used to create them: A
competitive advantage exists when an organization is able to provide
the same benefits from a product or service at a lower cost than a
competitor (low cost advantage), deliver benefits that exceed those
of a competitor’s product or service (differentiation advantage), or
create a product or service that is better suited to a given customer
segment than what the competition can offer (focus advantage). The
result of this competitive advantage is superior value creation for
the organization and its customers. If this advantage is successfully
implemented and marketed, it should result in improved profits and
market share.

Focus Advantage Strategies:

The following discussion is divided into two ways to create a focus
advantage:

Niche marketing (versus mass marketing).

Responsiveness.
Niche Marketing (vs Mass Marketing)
Firms can choose to develop products and services for a mass market
or for a relatively small slice of a larger market - a market niche.
Some examples of niche market approaches include

Catering to high-net-worth customers with products such as luxury

automobiles, yachts, large homes, or specialized services such as
estate planning, personal training, or expensive cruises.
Designing for a limited age group, such as children or senior
citizens with special needs instead of serving a broader population.
Providing products or services for residents of a particular
geographic area, such as growing vegetables for a neighbourhood
market rather than for packaging and shipping around the nation or
world.

Niche marketing shares some characteristics with product service

differentiation. In both cases, the product or service provided to
customers has special features. Differentiation by quality, for
example, can be the same thing as catering to high-net-worth
customers. (Low-net-worth customers, or value shoppers, can also be
niche.) Therefore, some supply chain strategies will work for both
approaches. Collaboration to achieve distinctive design is one
example. Depending upon the niche, sourcing may focus more on finding
special expertise or high-quality materials rather than on low-cost
labor.

Responsiveness:
Perhaps the most obvious example of responsiveness is the fast-food
industry that grew up in the last half of the 20th century, led by
McDonald’s. Diners at fine restaurants will happily wait half an
hour for their specially cooked steak, but employees on short lunch
breaks become impatient with even a few minutes in line as their
sandwiches are prepared, using the supply chain strategy. In the
early days of the Toyota Prius automobile - a highly differentiated
car—buyers were known to wait for months for a new vehicle. (The
same phenomenon occurred when the Volkswagen “Beetle” first came to
the United States, where it was both highly differentiated and a
low-cost option.) But businesspeople or diplomats on assignment
expect a rental car or limousine to be ready immediately when they
arrive at the airport. Manufacturers of clothing prosper or go
bankrupt by their ability to bring the latest seasonal designs to
market rapidly. Perishable products, such as raw food items, must
be delivered rapidly, unlike preserved foods. Services may also
compete on the basis of speed by cutting time spent waiting on the
phone, standing in line, or processing paperwork.

Supply chains designed for responsiveness may rely on substantial

supplies of safety stock to avoid outages. (Overstocked seasonal
items typically go on sale at the end of the season.) They may also
have multiple warehouses to place products nearer to users. Third-
party providers of rapid transportation, such as package delivery
services, were developed to suit the needs of such supply chains.

Choosing Business Strategies:

While some firms may focus primarily on one business strategy, others
may pursue a mix of strategies. Note, however, that making one
strategy the priority may make other strategies difficult to achieve.
For example, providing high quality at the lowest price is a
challenge. But not all the strategies are mutually exclusive. Product
differentiation and niche marketing fit well together. Either
responsiveness or low cost may be a key competitive factor that
differentiates a firm from its market rivals.

Once an organization has decided on a business strategy, it uses

these choices to drive the organizational strategy and eventually
the supply chain strategy.
Organizational and Supply Chain Strategy, Prioritization,
Capabilities, and Alignment:
Organizational Strategy:
Recall that the supply chain strategy of an enterprise identifies
how a company will function in its environment. The strategy
specifies how to satisfy customers, how to grow the business, how
to compete in its environment, how to manage the organization and
develop capabilities within the business, and how to achieve
financial objectives.

Where do you start when building an organization’s strategy? As

author and business consultant Stephen R. Covey says in The Seven
Habits of Highly Effective People, “begin with the end in mind,”
that is, think first about the goals of the supply chain strategy.

Goals of Organizational Strategy:

Whatever strategy the corporation adopts to satisfy customers, grow,
compete, organize itself, and make money, the supply chain has to
operate in a manner that furthers those goals. To give a simple
example, if customers are clamoring for deeply discounted prices on
durable, high-volume goods with stable demand, a supply chain
strategy that invests heavily in sourcing lower-cost materials in
emerging markets would be on target for accomplishing that goal.
Low-cost sourcing is probably the best option for this strategy
because purchasing machines involves a high capital investment and
lower labor expenses could help offset the investment costs. However,
you might also look into investing in equipment, as the high
investment is covered by lower labor costs and increased revenue.
(It is possible for an organization to do both¬ invest in automation
and move into a geographic area where labor costs are less. That
decision would be based on volume, payback period, product life
cycle, etc.).

Horizontal supply chains will contain a number of independent

organizations, each with its own goals, processes, operations,
technology, and strategy. So, when we refer to the necessity of
aligning supply chain strategy with organizational strategy, we are
referring to the strategies of a channel master or nucleus firm.
Traditionally, that’s the manufacturer of a product—the company that
sits right at the center of the chain (or network) with suppliers
in tiers on one side and customers on the other.
However, if a supply chain has a dominant firm with a dominating
supply chain strategy (one that is dictating its requirements to
others), for example, a large retailer, then supplier and
manufacturer strategies and goals must align with that retailer’s
organizational and supply chain strategies. The suppliers of
suppliers also have strategies to be brought into alignment. Finally,
the strategies, once aligned, have to do two things: serve the end
customers’ needs and be profitable for the chain as a whole and each
company individually.

The following looks at four types of organizational strategy in

detail: customer focus and alignment, forecast-driven enterprise,
demand-driven enterprise, and number of supply chains.

Supply Chain Strategy: Customer Focus and Alignment

When it comes to supply chains, it’s what’s good for the customer
that counts not what’s good for the nucleus company or even what
seems to be good for the supply chain itself Supply chain management
needs to be focused on giving the final customer the right product
at the right time and place for the right price. It isn’t necessarily
about the most advanced product or service, nor is it always about
the lowest price, the fastest time, or the most convenient place.
It’s about the balance of quality, price, and availability (timing
and place) that’s just right for the supply chain’s customer.

How does one determine what is the right amount of each of those
factors? There isn’t a simple formula that will help the supply chain
manager with this decision. But there are some basic premises that
will help you get started in determining the appropriate balance:

Serving the end-user customer is the primary driver of supply chain

decisions.
Organizations in the supply chain have to make a profit and stay in
business to serve the customer.

Functional teams in the organization will provide their input and

research on the optimal balance for the supply chain to meet customer
needs. Design engineers - or, better yet, design teams from across
the network—design products that are right for the end customer and
can be sold profitably. Market research looks for the true, and not
always obvious, needs in potential consumers that the supply chain
can be engineered to satisfy profitably. Logistics supply chain
strategy begins with data about customer demands for availability—
of materials, components, service, or finished products, depending
upon the customer—and then it looks for ways to move products in a
cost-effective way with acceptable risk.

Decisions are not just about product features or price or speedy

delivery. They are about the right features at the right price on
the right schedule. DOS was not a great operating system; it was
just the right operating system for the time and the market.

The term “customer” can be a complex concept in relation to supply

chains because there are multiple customers with different stakes
in the process. When we talk about customer focus, we mean the end
user, the consumer of the product. But usually only the retailer
actually sees the end user and has a direct relationship with that
person or entity.

Everyone else in the supply chain has a more immediate customer just
downstream to our right in the supply chain diagram. If the supply
chain is completely aligned in its focus on the end customer, then,
at least in theory, serving the customer just to an organization’s
downstream side would automatically serve the end user and also be
in the supplying organization’s best interest as well as the interest
of investors.

Moreover, within each supply chain partner there are internal

“customers” whose needs also must be aligned with corporate and
supply chain strategies. Each manager must understand his or her
role in making the supply chain profitable, and staff, too, must be
rewarded, motivated, and trained in alignment with the needs of the
supply chain’s end customer.

Consider sustainable supply chain management. Successfully managing

for sustainability requires a strategic mindset, involving numerous
personnel and financial resources and a commitment from suppliers
from first to lower tiers of the supply chain as well as consumers
further up the supply chain. Departments must cooperate with other
departments in their organization (e.g., purchasing and
environmental or design departments) and with their counterparts at
suppliers. This type of collaboration between supply chain partners
necessitates breaking down cultural barriers and building a culture
of trust to ensure that the focus is on end-to-end supply chain
activities and not just discrete supply chain processes. Creating
and managing a sustainable supply chain requires an organization to
be informed, exercise leadership, and cooperate with all supply chain
partners in achieving positive results on the triple bottom line.

Supply Chain Strategy: Forecast-Driven Enterprise

A second organizational strategy is the forecast-driven enterprise.
Simply put, this strategy is one in which the nucleus firm, usually
their manufacturer, utilizes a forecast, an estimate of future
demand, as the basis of its organizational strategy.

Here is the complicating factor: It is difficult to know what

customer requirements will be from day to day, month to month,
quarter to quarter, and so on. For instance, if a manufacturer was
guaranteed that its wholesale or retail customers were going to need
1,000 SKUs (stock keeping units) every Wednesday afternoon, then
getting those products to customers at the right time and place would
be a matter of simple calculation based upon lead times for
production and delivery. In turn, the manufacturer would look at the
bill of material, determine the lead time for each, and submit
schedules to its suppliers. Unfortunately, it’s difficult to predict
even the most stable demand—say, for a product like diapers. There
is some variability in demand for diaper, even though they aren't
subject to seasonal style changes or rapid peaks and valleys in
response to outside influences affecting ability to pay. (That’s why
Procter & Gamble cooperates with Wal-Mart to plan for demand and
replenishment of diapers.) The chain of demand begins at the far
retail end of the supply chain and works its way back toward the
source of raw materials used in making the product. The traditional
way of attempting to satisfy this demand is to forecast it.

In this retail example, forecasting along the chain works like this:

The retailer forecasts demand from parents who purchase diapers.

The wholesaler forecasts demand from all its retailers.
The manufacturer forecasts demand from the wholesale distributors.
The component suppliers forecast demand from manufacturers.
The raw materials suppliers forecast demand from the component
manufacturers.

How effective is this supply chain strategy? Let’s say you don’t
want to be placing large bets on the accuracy of all those forecasts.
Here’s what actually happens:
Parents vary their diaper-buying patterns in fairly small increments
due to . factors nobody fully understands. They may go to different
stores for a change, shop on Tuesday instead of Wednesday, or buy
two or three weeks’ worth at one time because the diapers are on
sale. So, actual demand never quite meets the forecast
Meanwhile the retailer had already ordered enough to allow a little
extra “safety stock” to put in its storeroom. (For retailers, safety
stock is a quantity of stock planned to be in inventory to protect
against fluctuations in demand or supply.) Or maybe the retailer
runs a promotion that is not communicated to the distributor, thus
resulting in needing a larger order than was previously forecasted.
These fluctuations impact forecasting for the distributor.
The wholesale distributor had forecasted demand based on past orders
from its retailers. But now those demand patterns have a wider
variability than the demand pattern at the retailer’s checkout
counters due to that safety stock the retailer held on to. Sometimes
the safety stock accumulates because demand is less than the
forecast, and this means that the retailer’s next order is for less
than its forecast—or perhaps it doesn’t have to order at the usual
time at all, because it has a glut of diapers—which it probably sells
off in a promotion. The upshot of all this is that the small
variations in end-user demand are magnified at the distributor.
Up the chain, the manufacturer of those diapers looks at the demand
pattern from the distributor and makes its own forecasts, which show
an even wider swing in variability.
And this variability goes up the chain with ever-wider swings.

As mentioned earlier in this chapter, this pattern of variability

is called the bull-whip effect, and it affects all manner of supply
chains that are based on serial forecasting by each independent
division or firm that touches the product as it travels from raw
material to finished retail item.

Strategy: Demand-Driven Enterprise

The next organizational strategy we’ll look at is the demand-driven
enterprise. The bull-whip effect is driven by demand forecasts; the
solution is to replace the forecasts with actual demand information.
This isn't necessarily a simple matter either, but supply chain
professionals have evolved techniques for letting actual orders (not
forecasts) drive production and distribution. In the demand-driven
chain, supply management is focused on customer demand. Instead of
manufacturers planning their operations based on factory capacity
and asset utilization, the demand-driven supply model operates on a
customer-centric approach that allows demand to drive supply chain
planning and execution—moving the “push-pull frontier,” as it’s
called, back up the chain at least to the factory. Instead of
producing to the forecast and sending finished products to inventory,
the production process is based on sales information. There is, in
other words, no fixed production schedule in a strictly demand-
driven supply chain. Product is turned out only in response to actual
orders, “on demand,” in other words. (Note, however, that on the
supplier side of the plant, forecasts still determine delivery of
raw material. The art of forecasting remains crucial, even in a
demand-driven chain.)

This is also known as a “pull system,” and it entails the following:

In production, the production of items only as demanded for use or

to replace those taken for use.
In material control, the withdrawal of inventory as demanded by the
using operations. Material is not issued until a signal comes from
the user.
In distribution, a system for replenishing field warehouse
inventories where replenishment decisions are made at the field
warehouse itself, not at the central warehouse or plant.
When a supply chain works in response to forecasts, it’s called a
“push” chain, and it entails the following:
In production, the production of items at required times based on a
given schedule planned in advance.
In material control, the issuing of material according to a given
schedule or issuing material to a job order at its start time.
In distribution, a system for replenishing field warehouse
inventories where replenishment decision making is centralized,
usually at the manufacturing site or central supply facility.

Everything in a push system is pushed downstream from one point to

the next according to schedules based on the forecasts. The supplier
delivers components in the amounts determined by the schedule to
inventory, where they await use in manufacturing. The plant turns
them into finished products and pushes the products to the
distribution center or the retailer, where they await an order from
downstream.

The challenge in changing from forecast-driven (push) to demand-

driven (pull) systems is in reducing inventory without also lowering
customer satisfaction. When a demand-driven system is set up and
managed properly, it can actually enhance customer service while
reducing costs. But stockouts are a risk. As always with supply
chains, the decision to switch to a demand-pull process trades one
type of risk for another:

In the forecast-push process, the risk is related to the build-up

of inventory all along the chain. Not only does inventory cost money
while it sits in a retail stockroom, distribution center, or
preproduction storage area; it runs the risk of becoming Obsolete
or irrelevant for a number of reasons. In a world of sapid
innovation, inventory obsolescence is a very real threat. (For
example, Cisco Systems, for years an exemplar of successful and
innovative supply chain management, had to dispose of US$2.25 billion
worth of useless inventory when the dot-coin bubble burst at the
beginning of this millennium. All those season close-out sales you
see in clothing and department stores are a way of clearing out the
overstock. Bookstore remainder tables (which are much less in
evidence than they were a decade or two in the past) are a sign of
inventory overhang caused by failed forecasting.
Magazine distributors used supply chain strategy to destroy huge
quantities of monthly magazines 12 times a year when they came back
from retail outlets. (Since magazines are inexpensive to produce and
destroy compared to their retail price, the distributors would rather
destroy ten copies than miss one sale.) Those are the results of
producing to forecasts that no one trusts and purposely overstocking
to be sure of meeting unexpectedly high demand.
In the demand-pull, make-to-order model, on the other hand, the risk
is that orders will begin to come in above capacity and al/ along
the chain there will be expensive activity to run the plant overtime,
buy more and faster transportation, or sweet-talk customers into
waiting for their orders to be filled or substituting a different
product. (Running short of stock is also a risk in the forecast-
driven chain. Forecasts can be wrong in either direction. That’s why
the safety stock builds up at each point where orders come in.) One
technique to prepare for uncertain demand is kitting, which is
preparing (making/purchasing) components in advance, grouping them
together in a “kit,” and having them available to assemble or
complete when an order is placed.

In Gartner’s annual supply chain report, they rank the top 25 demand-
driven supply chains, thereby underscoring the importance of this
strategy. In fact, the companies that gain a position on this list
have all applied demand-driven principles to coordinate supply,
demand, and product management to better respond to market demand.
If you would like additional information about this report, a link
is provided in the online Information Center.

In reality, most organizations pursue a push-pull supply chain

strategy and the point where push moves to pull is the key strategic
decision. Once that decision has been made, building a demand-driven
enterprise can require significant changes in all supply chain
processes. The following are some major steps:

Provide access to real demand data along the chain for greater
visibility of the end customer. The first requirement is to replace
the forecasts with real data. The only supply chain partner with
access to these data first hand is the retailer, and retailers in
the past have been no more willing to share business data than any
other firms. The other partners lack “visibility”—one of the main
supply chain principles. They simply cannot see what’s going on with
the end customer. But visibility supply chain strategy is a necessity
for building a pull system, and pioneers like Wal-Mart have led the
way in that regard. With point-¬of-sale scanning or radio frequency
identification (RFID), a retailer can alert its suppliers to customer
activity instantaneously. Instead of producing to the monthly
forecast, manufacturers with that kind of immediate signal from the
front lines can plan one day’s production runs at the end of the
preceding day. They produce just enough to replace the sold items.
Establish trust and promote collaboration among supply chain
partners. Collaboration is implied in the sharing of information.
But more is at stake than simply sharing sales information. Partners
may have to invest in new technology and develop new systems to be
able to use the real-time data. With orders going out without a
schedule, all processes will have to be altered—warehousing (storage
no longer needed), packaging, shipping, and planning will all be
handled differently in the new system. In return for receiving real-
time data that allow reduction of inventory; suppliers and
distributors have to agree to change their processes in whatever
ways may be necessary to make the new system function without
disrupting customer service.
Increase agility of trade partners. Because the inventory buffers
will not exist or will be much reduced in this demand-driven supply
chain, the trade partners need to develop agility—the ability to
respond to the variability in the flow of orders based on sales. The
plant, for example, may have to undergo considerable change if it
has to produce several different kinds of products under the new
circumstances. When making to forecast, a plant can run a larger
volume of each product to send to inventory. But when making to
order, the plant may have to produce several different types of
products in a day. There will be no room for long changeover times
between runs of different products; therefore, equipment, processes,
work center layouts, staffing, or siting—or all these things—may
have to change to create the capacity required to handle the new
system.
Strategy: Number of Supply Chains
The last strategy we’ll cover is based on a company having more than
one supply chain, depending upon the number and types of products
that are passing along the chain and other variables. For a product
with a complex bill of material (many parts that combine into many
components to make the final product), a manufacturer may be bringing
in materials from many suppliers. And these materials might range
from low-priced commodities to fragile or sophisticated materials
that require special shipping and handling. Suppliers might range
from small specialized firms to raw materials giants larger than the
manufacturer. Some are key accounts; some might be occasional buyers.
The finished products may be sold through several different channels—
c-commerce, printed catalogs, commercial, and retail. These
variables may combine in different ways, each suggesting its own
type of supply chain strategy. Next we’ll explore how product types,
functional versus innovative, often require different supply chain
strategies.

In “What Is the Right Supply Chain for Your Product?” Marshall L.

Fisher distinguished two types of products, functional versus
innovative, that require different supply chain strategies.
Functional products that change little from year to year have longer
life cycles (perhaps more than two years), relatively low
contribution margins, and little variety. Because demand for them
is stable, they are fairly easy to forecast, with a margin of error
of about 10 percent, very few stockouts, and no end-of season
markdowns. The appropriate supply chain for these products should
emphasize predictability and low cost with performance indicators
such as the following:

High average utilization rate in manufacturing.

Minimal inventory with high inventory turns.
Short lead time (consistent with low cost).
Suppliers chosen for cost and quality.
Product design that strives for maximum performance and minimal cost.

However, make-to-order functional products, such as replacement

parts for customized equipment, usually have long lead times (six
months to a year). Innovative products have unpredictable demand,
relatively short life cycles (three months for seasonal clothing),
and high contribution margins of 20 to 60 percent. They may have
millions of variants in each category, an average stockout rate from
10 to 40 percent, and end-of-season markdowns in the range of 10 to
25 percent of regular price. The margin of error on forecasts for
innovative products is high-40 to 100 percent—but the lead time to
make them to order may be as low as one day and generally is no more
than two weeks. The supply chain for innovative products should
emphasize market responsiveness rather than physical efficiency,
with performance indicators such as the following:

Excess buffer capacity and significant buffer (or safety) stock of

parts or finished items.
Aggressive reduction of lead times.
Suppliers chosen for speed, flexibility, and quality (rather than
cost).
Modular design that postpones differentiation as long as possible.

Innovative products, with their high margins and unpredictable

demand, justify the extra expense for holding costs. (Fisher also
proposes, however, that manufacturers of innovative products can
look for other solutions to the problem of unpredictable demand,
such as aggressively reducing lead times and producing products to
order rather than for inventory.)

Here is a conundrum... What happens when a product can fall into

either category? Fisher says that some products can be either
innovative or functional. Automobiles fit that description, with a
low-priced, no-frills car like a base model Chevrolet Cobalt or
Hyundai Excel representing the functional end of the spectrum and a
Porsche representing the other end. Similarly, coffee can be
functional—as anyone who has worked in an office knows, in which
case it should be available quickly at a low price with perhaps cream
and sugar as options. At a high-end coffee shop, on the other hand,
patrons are willing to endure longer lead times and pay more money
for their coffee, but they want variety in return.

The idea that the same type of product can be either functional or
innovative implies that one company might have more than one supply
chain. And that’s the contention of Jonathan Byrnes, a professor at
MIT. Writing in the Harvard Business School’s Working Knowledge,
Byrnes asserts that one supply chain is not enough; two, three, or
more would be preferable. “One size fits all” supply chains may have
been sufficient in the past, he believes, when that was the
competitive norm, but new information technology makes it possible
to have multiple, dynamic chains that can accommodate different
product and information flows.

Byrnes breaks products into three categories: staples, seasonal

products, and fashion.

Staples (which are much like Fisher’s functional products) have

steady, year-round demand and low margins. White underwear is an
example. Byrnes advises stocking staples only in retail outlets in
small quantities and transporting them in truckload quantities. (A
full truck, is more cost-effective for the shipper than a partially
loaded vehicle.)
Seasonal products could include outdoor patio furniture, holiday
decor, etc., for which the demand is more predictable since it is
tied to the holiday season.
Fashion products are like Fisher’s innovative items, with
unpredictable demand. Zara, the Spanish clothing manufacturer, has
two supply chains, one for staples and the other for fashion
clothing. To get the fastest response time, Zara uses European
suppliers for the fashion items. But for the more predictable demand
items, it uses eastern European suppliers that have poor response
time (not a concern) and lower cost.

In addition to varying the supply chain by product type, Fisher

recommends several other variables to consider—store type and time
in season or product cycle. Demand varies considerably over the life
cycle of many products. The same item might have infrequent demand
at first, more stable demand in its maturity phase, and falling
demand at the end of its life cycle. With more than one supply chain,
the nucleus firm can move its products from one chain to the other
in response to changing variables, such as type of channel or life-
cycle stage. Business and organizational strategies are formalized
and clearly specified within an organization’s business plan, so
this is discussed next.

Business Plan
A business plan is a written document that describes the overall
direction of the firm and what it wants to become in the future. A
business plan is defined in part as follows:
A statement of long-range strategy and revenue, cost, and profit
objectives usually accompanied by budgets, a projected balance
sheet, and a cash flow (source and application of funds) statement.
A business plan is usually stated in terms of dollars and grouped
by product family. The business plan is then translated into
synchronized tactical functional plans through the production
planning process (or the sales and operations planning process).
Although frequently stated in different terms (dollars versus
units), these tactical plans should agree with each other and with
the business plan.

The business plan provides general direction regarding how the firm
plans on achieving its long-term objectives. Key functions such as
finance, engineering, marketing, and operations typically have input
into the plan. The overall strategic plan cascades down to those
same functions.

The finance function manages and tracks the sources of funds, amounts
available for use, cash flows, budgets, profits, and return on
investment. Engineering is responsible for research and development
and the design and redesign of products that can be made most
economically. Marketing’s focus is on analysis of the marketplace
and how the firm positions itself and its products. (You will learn
more about the role of marketing in the next section.) The goal of
the operations function is to meet the demands of the marketplace
via the organization’s products. Operations also manages the
manufacturing facilities, machinery, equipment, labor, and-materials
as efficiently as possible. These functional roles collectively
support the success of the supply chain.

The business plan is based on and aligned with the business strategy
and with market requirements. It provides a framework for the
organization’s performance objectives that are tied to strategic
goals. In the ideal world, formation of and changes to the business
plan come from top management’s modifications to the business
strategy and organizational strategy. But in reality that may not
always be the case. This topic is discussed in more details in the
supply chain management courses designed for the diploma in supply
chain management program. These programs are offered by AIMS'
institute of supply chain management.

Supply Chain Strategies:

The supply chain has the overarching goal of providing customers
with goods and services when they want them, at a competitive price,
while being consistent with the organization’s and extended supply
chain’s strategies. If the supply chain cannot successfully execute
this supply chain strategy, the business, or product line, may cease
to exist.

When you think about the role the supply chain plays in the bigger
context of your company, the functional strategies underlying supply
chain management must articulate with the business plan, and remember
also that the purpose of supply chains is to be globally competitive.
Time, distance, and collaboration are basic elements in modern supply
chains that impact the chain’s ability to respond to competitive
changes in the global marketplace. The relationships of time,
distance, and collaboration weave like three bright threads through
the fabric of any supply chain on the globe. Therefore, collaborative
relationships are explored further as they are a primary component
of supply chain strategy.

STRATEGIC FIT

Strategic fit means that both the competitive and supply chain strategies have the same goal. It
refers to consistency between the customer priorities that the competitive strategy hopes to satisfy
and the supply chain capabilities that the supply chain strategy aims to built.

GLOBAL LOGISTICS / SUPPLY CHAIN BEST PRACTICES - TO SUPPORT AND DRIVE

BUSINESS SUCCESS AND TRENDS
Businesses often define their activities in terms of domestic and
export sales. This can be a shortsighted and restricting view.
Shortsighted firms also define their logistics and supply chains in
terms of freight, warehouse and other costs. They fail to understand
how much their customers and businesses are impacted by supply chain
management. Best practices in SCM lead to growth and prosperity.
However, often the result of all this myopic thinking is that these
firms trap themselves into being defined as a commodity product
provider where price is the key differentiator with competition.
They lack value proposition key customers.

Companies that view themselves as dynamic and as global see the

prospects for themselves. They have value propositions and supply
chain best practices that separate them from competitors; they know
that value propositions are about the customers-and not about what
the firms do. They understand trends; they lead. These firms
understand what supply chain management can do to not only create
service advantage but to be a catalyst for new business.

Two emerging trends are:

Direct To Market (D2M). D2M is selling direct to consumers in the

United States or Europe or elsewhere in the world. Instead of selling
to large retailers under the merchandisers' brand names or to
middlemen-and both of which make the large profit on the items-they
looking to go direct to consumers with their own products. Leaders
know that D2M lets them both improve profit margins and take control
of their businesses.
D2M firms know they must create their own brand identity. They know
that they need to build and direct a global supply chain that extends
from suppliers through to store shelves or to customers' warehouses.
It is no longer about handing off their export shipment to a freight
forwarder with a low rate. It is now about positioning SKUs (stock
keeping units) outside of the home country. The focus is managing
the flows of three supply chains-product, information and financial.
E-commerce. E-commerce is a way to begin D2M and can be a stand-
alone venture. It is an "easy" way to sell and to gain brand identity.
E-commerce opens multi-channel possibilities. It requires a very
responsive supply chain. Orders must be delivered quickly to
customers. Otherwise customers will cancel their orders and will
return shipments. Customer satisfaction is about good products and
good service. As with D2M, operations/supply chain success is about
more than making an export shipment. It is about positioning products
and integrating with platform technology.

Leader firms know that orders-whether they are replenishment,

customer or new products-- must be delivered complete, accurate and
on time. This must be done consistently; reliability is a hallmark
of best-in-class supply chains. These best companies know they use
supply chain best practices to effectively manage global supply
chains. Supply Chain Management Best Practices are:

Increase inventory velocity

Implement lean logistics / supply chain management
Improve supplier performance
Compress cycle time
Maximize inventory yield
Utilize meaningful metrics
Segment the supply chain
Employ supply chain technology
Products sold on a global marketplace basis, fast moving products,
products with short product life cycles, products with seasonality
must utilize best supply chain practices. It is not a choice; it is
a requirement.

Time and inventory are two important issues and drive the need for
supply chain management best practices.

Increase inventory velocity. nventory must move quickly; turns

should be high. It must flow from suppliers or manufacturing sites
to customers. Being inventory rich and cash poor is not a sound
approach. This is especially so for A items and many B items.
Products sitting in warehouses are limited as much as possible.

Implement lean logistics / supply chain management. Lean logistics

complements supply chain management. Both emphasize pulling, not
pushing, products through the supply chain. Both recognize-and lean
removes--the waste created by excess inventory and time and the need
for supplier performance.

Improve supplier performance. SSuccess begins with supplier

performance. They must deliver quality items and do it complete,
accurate and on time. Collaboration is important. Whether the
products are finished goods or materials for factories, the need for
strong supplier performance is there.

Compress cycle time. Cycle time runs from the time the need for a
product-now or replenished-is determined and goes until it is
delivered to the customer or to the store. The length of global
supply chains adds to the challenge.

Maximize inventory yield. There is a window of opportunity to get

the maximum price, the maximum, yield for products. Miss that window
and companies face reduced pricing and profit margins. Leaders
understand this in using best practices.
Utilize meaningful metrics. There are numerous measures for
companies and their supply chains. Many are measures for the sake
of metrics with little meaning to C-level executives or with little
value in really measuring supply chain performance. Meaningful
metrics are orders delivered complete, accurate and on time and time
related-such as days of inventory on hand, cycle time and others.

Segment the supply chain. Too many firms have one supply chain
approach for everything. This monolithic approach handicaps
performance, diverts resources, and creates static noise from
external and internal sources that distracts the supply chain
organization. The best segment their supply chain and focus
performance where it is most beneficial. Instead of practicing one-
size-fits-all supply chain management, they tier based on profit
margin or days of inventory or similar important ways.

Employ supply chain technology. Supply chain execution technology is

important to managing a global supply chain. It should provide
visibility throughout the entire supply chain. Tracking and tracing
is nice, but it misses the important factor. It is not about the
container or pallet of product. The key issue is to manage the
customer, purchase or build order through to delivery. Technology,
especially when tied with collaboration, can provide that.

Whether firms are looking to improve performance or move into D2M

or e-commerce, implementing supply chain management best practices
will lead businesses to their desired goal.