Supply Chain Management (18ME653) Module 1

MODULE 1
 Introduction
The supply chain encompasses all activities involved in the transformation of goods
from the raw material stage to the final stage, when the goods and services reach the end
customer. Supply chain management involves planning, design and control of flow of
material, information and finance along the supply chain to deliver superior value to the
end customer in an effective and efficient manner. As can be seen from the definition, the
supply chain not only includes manufacturers, suppliers and distributors but also
transporters, warehouses and customers themselves.

Fig. 1.1: A supply chain network.

Traditionally, firms have focused their energies on three main functions: purchasing,
manufacturing and distribution. Transport and storage activities within individual functions
and across functions have not received adequate attention, and have usually been handled
by the department managing the logistical aspects of the company. Initially, supply chain
management focused on the internal integration of activities in these three functional areas
with the logistics function. Gradually, firms realized that these activities have to be
coordinated, not just within a firm, but across the entire supply chain, keeping in mind the
material/product flow, right from the vendor to the end customer. To integrate material
flow across the chain, information and financial flow across the chain also have to be
integrated. As shown in Figure 1.1, a typical supply chain involves managing all the three
flows in the chain.

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 Evolution of Supply Chain Management

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

1. The First Revolution (1910–1920): Vertical Integrated Firms Offering Low Variety
of Products.
The first major revolution was staged by the Ford Motor Company where they had
managed to build a tightly integrated chain. The Ford Motor Company owned every part
of the chain right from the timber to the rails. Through its tightly integrated chain, it could
manage the journey from the iron ore mine to the finished automobile in 81 hours.
Ford innovated and managed to build a highly efficient, but inflexible supply chain
that could not handle a wide product variety and was not sustainable in the long run.
General Motors, on the other hand, understood the demands of the market place and offered
a wider variety in terms of automobile models and colours. Ford’s supply chain required a
long time for set-up changes and, consequently, it had to work with a very high inventory
in the chain. Till the second supply chain revolution, all the automobile firms in Detroit
were integrated firms. Even traditional firms in India, like Hindustan Motors, were highly
integrated firms where the bulk of the manufacturing was done in-house.

2. The Second Revolution (1960–1970): Tightly Integrated Supply Chains Offering

Wide Variety of Products.
Towards the end of the first revolution, the manufacturing industry saw many changes,
including a trend towards a wide product variety. To deal with these changes, firms had to
restructure their supply chains to be flexible and efficient. The supply chains were required
to deal with a wider product variety without holding too much inventory. The Toyota Motor
Company successfully addressed all these concerns, thereby ushering in the second
revolution. The Toyota Motor Company came up with ideas that allowed the final assembly
and manufacturing of key components to be done in-house. The bulk of the components
was sourced from a large number of suppliers who were part of the keiretsu system.
Keiretsu refers to a set of companies with interlocking business relationships and
shareholdings. The Toyota Motor Company had long-term relationships with all the
suppliers. These suppliers were located very close to the Toyota assembly plants.
Consequently, set-up times, which traditionally used to take a couple of hours, were
reduced to a couple of minutes. This combination of low set-up times and long-term
relationships with suppliers was the key feature that propelled the second revolution—and
it was a long journey from the rigidly integrated Ford supply chain. The principles followed
by Toyota are more popularly known as lean production systems.

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Gradually, when Toyota and other Japanese firms tried to set up assembly plants in
different parts of the world, they realized that they would have to take their suppliers also
along with them. In actual practice, the Toyota supply chain also had certain rigidities, such
as a permanent relation with suppliers, which could become a liability over a period of
time. This, in turn, led to the third revolution spearheaded by couple of progressive
companies like Dell Computers, Apple Inc., and Bharti Airtel, which offered, it customers
the luxury of customization with loosely held supplier networks.

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

Offering Customized Products and Services.
Technology, especially information technology, which is evolving faster than enterprises
can find applications for some of the innovations, is the fuel for the third revolution in
supply chain. It will probably take at least couple of years before we can fully understand
the IT-enabled model that has emerged and begin to apply it to all industries. However, we
have enough information to get a reasonably good understanding of the contours of the
third revolution. Key characteristics of the third revolution can be explained using the
example of Dell computers, Apple Inc., and Bharti Airtel. The first is a product company,
the second combines product and service, and third is a pure service organization. In each
of these organizations, we can see different aspects of the third revolution.

Dell computers allows customers to configure their own laptops (in terms of
processors, video cards, screen sizes, memory, etc.) and track the same in their production
and distribution systems. Apple offers personal digital devices to its customers and iPod is
a classic example. However, it is not just about the product. Apple allows the consumer to
have a personalized user experience through the features and services. Users can
personalize the music and other media content on their device through the various features
available on iPod. Similarly, Bharti Airtel allows services like My Airtel through which
customer can have unique personalized experience.
In summary, we have moved from single product (Model T black colour) to wide
variety as offered by Toyota to customization as offered by companies such as Dell
computers, Apple, and Bharti Airtel. Organizations have moved from offering products to
offering user experiences, which are a bundle of goods and services selected by the user.
This has changed the way supply chains are configured to deliver value.

 Role of SCM in economy

Manufacturing managers decide where to locate the company based on the costs of
production. That's led to a lot of jobs outsourcing in technology to India and China.
Many call centers have outsourced to India and the Philippines.

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Natural disasters are becoming an increasing threat that can disrupt any part of the supply
chain. The United Nations Refugee Agency reported their frequency has doubled in the
last 20 years due to global warming. The impact on local productivity can last decades after
an event. If a disaster is bad enough, it can slow global growth. In 2011, Japan's
earthquake and the resultant tsunami created the most damage to the world's supply of
automobiles, electronics, and semiconductor equipment. The wings, landing gears, and
other major airline parts are also made in Japan, so the quake disrupted the production
of Boeing's 787 Dreamliner. U.S. gross domestic product slowed in 2011 as 22 Japanese
auto part plants suspended production.

 The Importance of the Supply Chain

In the past, customers were not very demanding and competition was not really intense. As
a result, firms could afford to ignore issues pertaining to the supply chain. Today, firms
that do not manage their supply chain will incur huge inventory costs and eventually end
up losing a lot of customers because the right products are not available at the right place
and time. The following are the five major trends that have emerged to make supply chain
management a critical success factor in most industries.
1. Proliferation in product lines. Companies have realized that more and more product
variety is needed to satisfy the growing range of customer tastes and requirements. This is
evident from the fact that every time a customer walks into a neighborhood store, he or she
is bound to discover a couple of items on the shelf that he or she had not seen during his or
her last visit and that he or she has more varieties to choose from now. Every time you
walk into a neighborhood store, do not be surprised to find that even a simple product like
toilet soap has 50-odd varieties. With increasing product variety, it becomes rather difficult
to forecast accurately. Hence, retailers and other organizations involved in the business are
forced to either maintain greater amount of inventories or lose customers.
2. Shorter product life cycles. With increased competition, product life cycles across all
industries are becoming shorter. For example, technology leaders like Apple works with a
life cycle as short as 6 months. So a firm like Apple, which has, on an average, just 5 days
of inventory as compared to the industry average of 35 days, does not have to worry about
product and component obsolescence. Its competitors with higher inventories end up
writing off huge amounts of stocks every year as obsolete. In the past, in developing
countries where inflation was a way of life, higher inventories used to be a major source of
profits for the firm. With inflation in control and shorter product life cycles, firms have had
to change the way they manage their inventories. Also, with shorter product life cycles,
there is not much data available for demand forecasting. Most of the technology firms find
that 50 per cent of their revenue comes from products that were introduced in the last three
years.

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3. Higher level of outsourcing. As discussed in the section on “Evolution of Supply Chain

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

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

5. Globalization of manufacturing. Over the past decade, tariff levels have come down
significantly. Many companies are restructuring their production facilities to be at par with
global standards. Unlike in the past, when firms use to source components, produce goods
and sell them locally, now firms are integrating their supply chain for the entire world
market. For example, companies like ABB have developed some global centers of
excellence for each of their product lines that take care of the global market. General
Motors is talking about a world car and has been designing a few cars for global markets.
In the telecommunications and electronics industry, companies usually get their chips from
Taiwan, test them in Europe and finally integrate them with other products in the United
States of America to sell in the international market. This has made managing supply chains
extremely complicated. Unlike information and finance flow, which can be managed
electronically, materials and products have to move physically, and as this movement can
even be across continents, managing supply chains is now an extremely complex issue.

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 DECISION PHASES IN A SUPPLY CHAIN

Successful supply chain management requires many decisions relating to the flow of information,
product, and funds. Each decision should be made to raise the supply chain surplus. These
decisions fall into three categories or phases, depending on the frequency of each decision and the
time frame during which a decision phase has an impact. As a result, each category of decisions
must consider uncertainty over the decision horizon.
1. Supply Chain Strategy or Design
2. Supply Chain Planning:
3. Supply Chain Operation
Supply Chain Strategy or Design: During this phase, given the marketing and pricing
plans for a product, a company decides how to structure the supply chain over the next
several years. It decides what the chain's configuration will be, how resources will be
allocated, and what processes each stage will perform. Strategic decisions made by
companies include whether to outsource or perform a supply chain function in-house, the
location and capacities of production and warehousing facilities, the products to be
manufactured or stored at various locations, the modes of transportation to be made
available along different shipping legs, and the type of information system to be utilized.
A firm must ensure that the supply chain configuration supports its strategic
objectives and increases the supply chain surplus during this phase. Supply chain design
decisions are typically made for the long term (a matter of years) and are very expensive
to alter on short notice. Consequently, when companies make these decisions, they must
take into account uncertainty in anticipated market conditions over the next few years.
Supply Chain Planning: For decisions made during this phase, the time frame considered
is a quarter to a year. The goal of planning is to maximize the supply chain surplus that can
be generated over the planning horizon given the constraints established during the
strategic or design phase. Companies start the planning phase with a forecast for the coming
year (or a comparable time frame) of demand in different markets. Planning includes
making decisions regarding which markets will be supplied from which locations, the
subcontracting of manufacturing, the inventory policies to be followed, and the timing and
size of marketing and price promotions. Planning establishes parameters within which a
supply chain will function over a specified period of time.
In the planning phase, companies must include uncertainty in demand, exchange
rates, and competition over this time horizon in their decisions. Given a shorter time frame
and better forecasts than the design phase, companies in the planning phase try to
incorporate any flexibility built into the supply chain in the design phase and exploit it to
optimize performance. As a result of the planning phase, companies define a set of
operating policies that govern short-term operations.

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Supply Chain Operation: The time horizon here is weekly or daily, and during this phase
companies make decisions regarding individual customer orders. At the operational level,
supply chain configuration is considered fixed, and planning policies are already defined.
The goal of supply chain operations is to handle incoming customer orders in the best
possible manner. During this phase, firms allocate inventory or production to individual
orders, set a date that an order is to be filled, generate pick lists at a warehouse, allocate an
order to a particular shipping mode and shipment, set delivery schedules of trucks, and
place replenishment orders. Because operational decisions are being made in the short term
(minutes, hours, or days), there is less uncertainty about demand information. Given the
constraints established by the configuration and planning policies, the goal during the
operation phase is to exploit the reduction of uncertainty and optimize performance.

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

 Supplier, manufacturer and customer chain:

Learning the process stages of the supply chain will help you better understand the sequence of
activities in fulfilling customer need for a product. Every stage has its supply chain and collectively
work together to satisfy customer demand. The synchronization of all stages forms a supply chain
network needed to ensure an uninterrupted flow of product, information, and money.

Fig. 1.2: Supplier, manufacturer and customer chain:

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Pull and push systems in the supply chain process view are presented in the above figure. These
systems determine as to when to respond to customer order with minimal supply chain cost.
Processes in a pull system are executed when a customer order arrives at the retailer. The retailer
then fulfills the order based on actual demand. In basic terms, a customer pulls inventory from the
retailer’s shelf. While the push system does the opposite. Processes are executed in response to
forecast and speculation based on demand signal. Push system enables the supplier to push
inventory closer to the customer to compensate for demand variability.

Pull system is suited for make-to-order or engineer-to-order products because customers

are willing to wait to get the goods. The company may not have to stock inventory because it
responds to actual demand rather than the forecast. Pull system is usually applied to lean
operations. On the contrary, the push system works well with make-to-stock products because the
manufacturer needs to maintain the required service level in response to demand fluctuation. The
service level is achieved through on-hand inventory as it protects customers from experiencing
stock-outs. While inventory is necessary, it must be optimized within the desired service level.
Push system is appropriate for mass manufacturing where demand is uncertain.

These are the primary members of the simple, basic supply;

 Supplier
 Manufacturer
 Distributor
 Retailer
 Customer

However, given the complexities in today’s supply chain, players above need to be enabled with
additional capabilities to survive. The chain must extend to accommodate other supply chain
participants. The extended supply chain is where supplier’s suppliers are added in the upstream
side and customer’s customers on the downstream supply chain. These providers help the
company’s supply chain more secure and agile. They provide a range of needed solutions to all
participants in the supply chain. For instance, an IT company provides an ERP system to the
business extending its capability from real-time information sharing to global compliance to
customer analytics. We will look at how your shirt gets to the retail shelf and ultimately to you as
the end user.

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Fig. 1.3: Typical supply chain of a shirt.

The figure above shows that it took several steps to move one material to the next until a shirt
becomes available in the retail shelf for the customer to buy. Simply put, a shirt travels from
different levels of processes and players within the supply chain network. Supplier tier 2 has its
supply chain so as tier 1, the manufacturer and so on. Each of them manages its activities adding
value to the creation of a shirt. That illustration unlocks basic understanding about the supply
chain.

 Enablers of Supply Chain Performance

As mentioned in the previous section, managing supply chains is becoming increasingly complex.
Despite this, firms have actually managed to reduce their logistics costs. For example, in a country
like the United States of America, logistics costs used to account for 15 per cent of the gross
domestic product (GDP) in the 1980s. Today, because of innovations in technology and
management practices, logistics costs account for about 8.5 per cent of their GDP. Three major
enablers that have helped firms and nations in reducing supply chain costs are briefly discussed
below.

1. Improvement in Communication and IT

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

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Improvement in Communication and IT

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

Emergence of Third-party Logistics Providers

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

Enhanced Inter-firm Coordination Capabilities

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

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 Supply chain strategy

A firm’s supply chain strategy should ensure that its supply chain provides superior value to the
end customer in an efficient manner. Value offering (bundling of goods and services) to a customer
should be available at a reasonable price. In almost all product categories, customers want more
variety and quicker services at lower prices. Firms must recognize the nature of trade-offs between
customer service and costs and arrive at an optimal decision on this front. If various processes and
decisions within the chain are not aligned to suit a company’s business strategy, it obviously cannot
remain competitive in the long run. The firm has to understand the relationship between business
strategy and supply chain decisions and how different business environments pose different kinds
of challenges to the supply chain. Although at any given point managers need to understand
customer service and cost tradeoffs, in the long run firms will have to find a way of improving
performance on both cost and service fronts. Because of the nature of competition, customers will
demand better services at lower prices over a period of time. Progressive firms resolve this paradox
through various supply chain innovations. To enhance supply chain performance, firms have to
identify the right kind of initiatives to help improve both costs and customer service
simultaneously on an ongoing basis.

Customer Service and Cost Trade-offs

A firm must ensure a smooth fit between its business strategy and supply chain strategy.
The supply chain strategy includes issues of cost that the firm has to incur to provide the targeted
level of customer service. To understand the relationship between the supply chain strategy and
the business strategy, we need to understand cost versus service trade-offs in business. As
discussed earlier, the supply chain must provide superior value to the end customer in an effective
and efficient manner. For a given supply chain design, firms generally have an efficient frontier,
which defines the nature of trade-offs between supply chain costs and customer service. Ideally,
firms prefer to provide a very high level of customer service (high variety, short delivery time,
etc.) at very low cost.

Fig. 1.4: Supply chain trade-offs.

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However, as illustrated in Figure 1.4, firms must recognize the nature of trade-offs between the
supply chain cost (marginal cost) and customer service. If a firm wants to improve its performance
on the customer service front, it must accept deterioration in performance on the cost front and
vice versa. For example, if a pizza company delivering pizzas in 40 minutes wants to deliver in 20
minutes, its costs would increase. An efficient frontier, shown in Figure 1.4, provides a lower
envelope, below which a firm cannot choose to operate. Efficient firms can choose to operate on
any point of the efficiency frontier.

Impact of customer service level on revenue and costs

Total costs increase exponentially with increase in service, while revenue follows an S-shaped
curve. Therefore, it will be optimal for a firm to operate at a specific level of customer service, as
shown in Figure 1.5 (b). This level, however, is not always static but changes with customer taste
and competitive offerings, affecting the shape of the revenue curve, while supply chain innovations
affect the cost curve.

Fig. 1.5: (a) Revenue impact of service level (b) Profit impact of service level.

A company will need to conduct market research to determine the revenue and contribution
potential of increased customer service. Further, customer profitability analysis must be carried
out to identify the right market segments. Similarly, while planning sales promotions, marketing
and supply chain strategists should work together to ensure that the supply chain is well equipped
to handle any additional demand in a profitable way. Thus, well-managed firms always consider
marketing and supply chain decisions in tandem, and not independently.

Four dimensions of the customer service in a supply chain

 Order delivery lead time
 Responsiveness
 Delivery reliability
 Product variety

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Shorter lead time, higher responsiveness, higher reliability and higher product variety lead to better
customer service. Improvement in performance on any of these four fronts will result in higher
costs. Depending on customer expectations and product characteristics, different dimensions of
the supply chain have varying levels of impact on the overall value of customer service.

Order Delivery Lead Time

Order delivery time is the time taken by the supply chain to complete all the activities from order
to delivery. This dimension of customer service has a significant impact on the way a supply chain
is designed and operated. Customer expectations on order delivery time could be practically zero,
as in the case of most of FMCG goods, or could be 1 week for certain consumer durables. For
example, a typical customer might expect pizzas to be served in 15 minutes at any pizza outlet, or
expect delivery in 40 minutes if the order has been placed for home delivery. E-retailers like
Fabmart promise to deliver goods within 48 hours at the doorstep of customers located in major
cities. Caterpillar pledges its commitment to customers: service within 48 hours at any place on
earth. For each of these firms, promised order delivery lead time has tremendous implications on
supply chain design and operations.

Fig. 1.6: Interaction between supply chain lead time and delivery lead time.

As shown in Figure 1.6, a typical firm sources material, manufactures components, assembles the
product and delivers the finished product to the end customer, with each of these activities having
a certain lead time. If we aggregate all the four lead times, we get the supply chain lead time, which
is the total time required for the supply chain to carry out all activities from the beginning to the
end.

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Fig. 1.7: Order penetration point based supply chain typology.

A critical characteristic of the supply chain is the customer order penetration point or decoupling
point. There are essentially three types of supply chains characterized by the customer order
penetration point: make to stock (MTS), make to order (MTO) and configure to order (CTO).
Figure 1.7 is a conceptual representation of these three types of supply chains. If customers expect
their order (an order can either be a formal document or even an informal instruction, e.g., a
customer asking a retailer for a tube of tooth paste is treated as an order) to be fulfilled
instantaneously, then the supply chain is in the MTS business. If the supplier gives enough time to
the firm to assemble the product before delivery, it is in the CTO business. If the customer gives
enough time to the manufacturer to carry out the complete set of operations (source, make,
assemble and deliver) after placing the order, it is in the MTO business. Typically, firms in the
consumer products business operate on an MTS basis where the customer expects the products to
be on the shelf at the retailer’s outlet. Equipment manufacturers typically operate with an MTO
supply chain where all the activities are started after getting the order. A firm in the pizza home
delivery business is in the CTO business, because your pizza is configured the way you want, with
the toppings of your choice, using ingredients kept in readiness, prior to an order. CTO is also
known as assemble to order (ATO) or build to order (BTO) business model.

Push–Pull Boundary of the Supply Chain : Order delivery lead time also can be used for
drawing a push–pull boundary of the supply chain. All the processes in the supply chain are divided
into two categories based on their position in a supply chain with respect to the customer order
point. As shown in Figure 1.8, all the processes carried out before the customer order point are
managed through the push approach, and all the processes carried out after the customer order are
managed through the pull approach. The interface between the push-based processes and the pull-

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based strategy is known as the push–pull boundary. All the processes managed by pull approaches
do not face any uncertainty because they are carried out against specific orders. As they are
executed against specific customer orders, they operate on customer pull and, hence, are known as
pull based processes. On the other hand, processes prior to the customer order are executed based
on forecast, and as there is no known customer pull in this case, these activities are pushed within
the chain; thus, they are known as push-based processes.

Fig. 1.8: Push–pull boundary of supply chains.

The inventory at the push–pull boundary is used to decouple the push and the pull
processes. Firms like Asian Paints and Dell Computers are able to assemble and deliver a wide
variety of finished goods demanded by the end customer from relatively few components stocked
at the push–pull boundary. In MTS supply chains, the push–pull boundary is at the end of chain
and all processes are managed using the push approach. In MTO supply chains, all processes are
managed using the pull approach and the push–pull boundary is located at the beginning of the
chain. In CTO supply chains, the push–pull boundary is usually positioned after component
manufacturing.

Responsiveness
Responsiveness captures the firm’s ability to handle the uncertainty of market demand. In addition
to delivery lead time, supply chains have also been characterized on the basis of the nature of
demand uncertainty faced by products in the market place. Based on the nature of demand
uncertainty, products can be classified as functional products or innovative products. Functional
products (grocery) are those that satisfy the basic needs of a customer and therefore have low
variety, stable and predictable demand, long life cycles and low profit margins. Innovative
products (fashion and technology products) are those that try to satisfy a broad range of customers’
wants and have the following features: high variety, unstable and very-hard-to-predict demand,
short life cycles, high profit margins and frequent stock-outs and markdowns. See below table, for
details on the differences of various aspects of demand for different product categories.

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Physical function is the process of converting materials into parts, then to finished products and
then transporting them across the various stages of the chain. Relevant costs incurred are due to
production, transportation and inventory storage. The market mediation function ensures that the
variety of products reaching the market matches the needs of the customers. Relevant costs
incurred are due to demand supply mismatch, resulting in either obsolescence or lost sales and
dissatisfied customers. In the case of functional products, the focus is on meeting predictable
demand cost effectively, while for innovative products, the focus is on meeting unpredictable
demand cost effectively. As shown in Figure 1.9, firms must ensure an appropriate match between
the type of supply chain and the nature of product characteristics.

Fig. 1.9: Push–pull boundary of supply chains.

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Supply Chain Management (18ME653) Module 1

Delivery Reliability
As discussed in the earlier section, delivery lead time is an important dimension of customer
service, and delivery reliability essentially captures the degree to which a firm is able to service its
customers within the promised delivery time. Delivery reliability measures the fraction of
customer demand that is satisfied within the promised delivery lead time. For firms operating on
an MTS model, the percentage of orders getting served from the stock is known as product
availability, also commonly referred to as service level in supply chain literature. Similarly, for
companies offering products based on the CTO or MTO model, delivery reliability captures the
percentage of orders that are delivered within the promised delivery lead time. Given the nature of
demand and supply uncertainty, it is obviously more expensive to provide higher levels of service.
Essentially, firms have to tradeoff inventory costs and stock-out costs to arrive at the optimum
service level. In the MTS business, a firm has to keep higher inventory if it is to offer higher levels
of service. Firms in the CTO business will have to hold higher inventory before the order
penetration point and after that slack capacity in the system if they want to offer higher delivery
reliability to customers. Firms in the MTO business will have to work with slack capacity in the
entire system if they want to offer high delivery reliability. In general, firms will have to arrive at
an optimal trade-off between cost (costs related to high inventory and slack capacity) and service
level while deciding on this issue. In the industrial products category, performance on the delivery
reliability front is monitored and the supplier is usually chosen based on performance on this front.

Product Variety
The quantum of variety offered by a firm is an important dimension of customer service. In the
past couple of years, a “variety explosion” has taken place in most product categories. Higher
product variety offers greater choices to the customer who is likely to get a product that fits closest
to his or her actual requirements. Some firms like Dell Computers and National Panasonic go to
the extent of allowing their customers to design their own products. Obviously, higher variety
would lead to greater complexity, resulting in higher supply chain costs. Some firms have found
that variety explosion has affected firm profitability in an adverse way. Firms like P&G have
worked on product rationalizations and have reduced overall product variety. While deciding the
optimum level of product variety, a firm has to manage trade-offs with other dimensions of
customer service like order lead time. For example, if you go to a fast food outlet, you know there
is less variety but expect food to be served in a few minutes; in a restaurant, you are ready to wait
for 15–20 minutes but do expect a greater variety.

 Supply Chain Performance Measures

In this section, we look at an exhaustive list of supply chain performance measures and
demonstrate the significant impact of supply chain performance on business performance using
benchmarking data and also show the methodology for linking the two. Among various sets of
supply chain performance measures discussed in the literature, we focus on a set of performance
measures that have been most widely accepted in the industry. The Supply-Chain Council is an
independent, non-profit, global corporation interested in getting the industry to standardize supply

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chain terms so that meaningful supply chain benchmarking can be carried out. It has developed
the Supply Chain Operations Reference (SCOR) model as the industry standard for supply chain
management. Several supply chain software vendors have adopted the SCOR performance
measures in their performance management module. SCOR recognizes six major processes: Plan,
Source, Make, Delivery, Return, and Enable. As per the SCOR model, supply chain performance
measures fall under the following five broad categories:

• Cost
• Assets (Asset Management Efficiency)
• Reliability
• Responsiveness
• Agility

Fig. 1.10: Push–pull boundary of supply chains.

Further, the SCOR model develops 10 performance measures as shown in Figure 1.10. The
Supply-Chain Council refers to measures related to costs and assets as internal-facing measures,
while reliability, responsiveness, and agility are termed as customer-facing measures. Typically, a
firm offers a bundle consisting of price, delivery and flexibility to its customers. Price, in
competitive markets, is dictated by the market place. Thus, only delivery- and response-related
measures are termed as customer-facing measures. The performance measures related to assets
and costs affect the profitability of the firm and are, thus, termed as internal-facing measures. The
use of standard measures allows firms to carry out meaningful benchmarking studies.

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