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Supply chain management- an overview

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International Journal of Logistics and Supply Chain Management, 2(2), 2010, pp. 97-101

SUPPLY CHAIN MANAGEMENT: AN OVERVIEW

A. K. MALIK1, AMANDEEP SINGH1, SIMRAN JIT1 AND C. P. GARG2
1
Department of Mathematics, B. K. Birla Institute of Engineering & Technology, Pilani (Rajasthan)
2
Department of Management, Kedarnath Agarwal Institute of Management, Charkhi Dadri (Haryana)

Abstract: India is moving fast towards its economic development. Crucial changes have occurred in today’s economy which
has in turn altered the relationship between customers, suppliers and business organizations. Supply chain management
deals with the management of supply chain activities to maximize customer value and achieve a sustainable competitive
advantage. The goal of this paper is to provide an overview of supply chain management. It sheds some light on aspects
such as the basic stages of a supply chain, supply chain decisions, modelling approaches to supply chain management and
the common problems faced by supply chain management. The role (i.e. affects and effects) of SCM in sectors such as IT,
ERP, health care, warehousing, retail have been briefly illustrated.

1. INTRODUCTION for finished products. In the 1980s the development of

In its earliest stages supply chain was a set of linear, Manufacturing Resources Planning (MRP-II), bringing with
individualized processes that linked manufacturers, it systems that could be used for planning all manufacturing
warehouses, wholesalers, retailers and consumers together resources, including those related to operational planning,
in the form of a human/paper chain. This often resulted in financial planning, business planning, capacity requirements
miscommunication between different groups due to poor planning, and master production scheduling. It was MRP-
information and lack of coordination. Synergy of II’s extension into the business enterprise that evolved into
procurement, demand planning and forecasting, inventory an entirely new information technology sector: Enterprise
management, transportation modes was still far from Resource Planning, or ERP. Inculcation of ERP in SCM
possible. However, as manufacturing and economic growth helped to cut down costs, improve the quality of working
flourished during the 1950s, there developed a greater time, make maximum use of technological advancements,
interest in the need for SCM. After 1950, supply chain increases the ability to respond to a query by determining
management got a boost with the production and the status of product delivery and provide reliable
manufacturing sectors getting highest attention. The information. Logistics activities exist since the early 1900s.
inventory became the responsibility of the marketing, These activities were first associated with the military as a
accounting and production areas. Order processing was part branch of war that pertains to the movement and the supply
of accounting and sales. Supply chain management became for armies. Military forces always used to make use of
one of the most powerful engines of business transformation. logistics models to ensure the availability of the required
It is the one area where operational efficiency can be gained. material at the right place and on right time. Following its
It reduces organization costs and enhances customer services. success, it was adopted in industries to establish a smooth
Business today is in a global environment. This environment flow of goods through various organizations till the finished
forces companies, regardless of location or primary market product reaches the end customer.
base, to consider the rest of the world in their competitive Earlier supply chain management merely dealt with
strategy analysis. Firms cannot ignore external factors such procurement, developing and distribution. However, with the
as economic trends, competitive situations or technology evolution of the supply chain management the actual focus
innovations in other countries, if some of their competitors has shifted to integration, transparency, cycle time reduction
are competing or are located in those countries. Companies and coordinated channels. Companies are going truly global
are going truly global with Supply Chain Management. with Supply-chain Management (SCM). For instance, a
In the 1960s the first inventory management software company can develop a product in the United States,
systems were developed which aided inventory control in manufacture in India and sell in Europe. Companies have
the manufacturing sector. In the 1970s, SCM innovations changed the ways in which they manage their operations and
brought forth Material Requirements Planning (MRP) – a logistics activities. Changes in trade, the spread and
system that dealt with production and purchase orders to modernization of transport infrastructures and the
ensure that the flow of raw materials and in-process intensification of competition have elevated the importance
inventories matched the manufacturer’s production schedules of flow management to new levels. SCM is a concept or a
98 International Journal of Logistics and Supply Chain Management

mechanism to improve the total productivity of enterprises 3. STAGES (SCOR MODEL)

in a supply chain by optimising the timing, location and The SCOR (Supply Chain Operations Reference) model was
quantity of materials flow from raw material provider to the created 12 years ago based on the core components of Plan,
consumer of the final products. Develop, Make, and Deliver, with Return added more
2. WHAT IS SUPPLY CHAIN MANAGEMENT?
recently. The model has stood the test of time because from
the very beginning it took a practical approach. It looked at
The concept of Supply Chain Management is based on two supply chain as a discipline and had nothing to do with
basic pillars. First being that, it is the cumulative effort of whether or not advanced technology was available, or
multiple organizations that ensure that practically every whether or not suppliers were present who were global or
product reaches an end user. These organizations are jointly just around the corner. It was all about the basic concepts of
termed as the supply chain. Second, most of the organizations supply chain, which really are timeless concepts.
heed to the happenings limited to that of their inner walls Supply chain management helps organizations to ensure
even though supply chains have existed for a long time. Only that their supply chain is economical as well as efficient. A
a handful of organizations understood, and even a fewer were supply chain is the collection of steps taken by an
able to manage, the entire chain of activities that finally organization to convert raw material into the finished
delivered the product to the final customer. This practice product. Supply chain management is categorised into five
often led inefficient management of supply chains. basic stages:
The first thing that one needs to understand is that SCM Plan: A strategy must be developed to address how a
doesn’t replace any exiting theories of management over the given product or service will cater to the needs of the
last 50 years; it simply builds upon them. Organizations must customers. A significant aspect of the plan should concentrate
first be able to provide quality products or services in a on planning a lucrative supply chain.
timely, cost-effective manner if they want to tackle broader Develop: It involves establishing a strong relationship
supply chain issues. The second thing to understand about with suppliers of the raw materials which is required in
SCM is that it often requires significant changes in the firm’s making the final product that the organization delivers. This
organizational structure. SCM issues influence every aspect stage not only involves identifying reliable suppliers but also
of an organization and so the responsibility and authority involves planning methods for transportation, delivery, and
for implementing SCM must be placed at the highest levels payment.
of an organization. Third, SCM requires firms to put in place Make: The product is manufactured, tested, packaged,
an information system that focuses on the performance across and scheduled for delivery.
the entire supply chain. This is because sometimes when Deliver: This is the logistics phase. The customer orders
individual units seek to maximize their performance, without are received and the finished product is delivered to
considering the broader impact it might have on the other customers as ordered.
units in a supply chain, it can cause problems. For example, Return: This stage deals with aspects such as customer
a manufacturing unit’s decision to minimize its inventory service. The customers may return defective products. The
levels may reduce delivery performance to the end user. company will also address customer questions in this stage.
Finally, SCM adds another layer of complexity to a firm’s
strategy development efforts. Years ago, firms could succeed 4. SUPPLY CHAIN DECISIONS
by being particularly good in one functional area, such as Supply chain management decisions can be divided into two
marketing, finance, or operations. Then firms recognized that broad categories —operational and strategic. Operational
they had to have sufficient capabilities across multiple decisions concentrate on day to day operational activities
functional areas in order to survive. Nowadays, much and are of a smaller magnitude. These decisions effectively
competition occurs between multi-firms supply chains, not and efficiently manage the product flow in the tactically
just between individual firms. In addition to their debates planned supply chain. While strategic decisions are of a
about functional and business level strategies, then, managers greater magnitude and require a longer time horizon. They
must now address how they will partner with other firms in deal with business strategies and direct supply chain policies
order to compete. with respect to their design. There are four major decision
Supply chain management incorporates the planning and areas in supply chain management and they include elements
management of all activities involved in sourcing, of, both, operational and strategic decisions.
procurement, conversion and distribution of product. It is Location Decisions: These are the primary decisions in
all about synergy with suppliers, third-party service providers creating a supply chain which deal with site selection for
and customers. Supply chain management assimilates supply manufacturing facilities, storage facilities, and sourcing
and demand management within and across organizations. points. It also includes determining the best path for the flow
It is the active management of supply chain activities to of products to the end customers. Although they are basic
maximise customer value and achieve a sustainable decisions they are quite significant as they help in developing
competitive advantage. tactics regarding marketing, revenue, cost, and service. These
Supply Chain Management: An Overview 99

decisions help to optimize production costs, taxes, duties Modelling approaches can be categorised into two basic
and duty drawback, tariffs, local content, distribution costs, areas:
production limitations, etc. Network Design Methods: This approach provides
Production Decisions: These relate to strategic standard models for the more strategic decisions. These
decisions which include what products to produce, which models characteristically cover the four major decision areas
plants to produce them in, allocation of suppliers to plants, described earlier, and focus more on the design aspect of
plants to distribution centres, and distribution centres to the supply chain, the establishment of the network and the
customer markets. These decisions also have an impact on associated flows on them. These methods determine the
the revenues, costs and customer service of the firm. It also location of production, stocking, sourcing facilities and the
addresses aspects concerning the capacity of the path taken by the product through them. Such methods tend
manufacturing facilities. The operational decisions focus on to be large scale, and used generally at the inception of the
detailed production scheduling. These decisions include the supply chain. Network design based methods add value to
construction of the master production schedules, scheduling the firm in that they lay down the manufacturing and
production on machines, and equipment maintenance. Other distribution strategies far into the future. It is imperative that
considerations include workload balancing, and quality firms at one time or another make such integrated decisions,
control measures at a production facility. encompassing production, location, inventory, and
Inventory Decisions: These decisions deal with transportation, and such models are therefore indispensable.
managing inventories which exist at every stage of the supply Although the above review shows considerable potential for
chain as either raw material, semi-finished or finished goods. these models as strategic determinants in the future, they
Effective management of inventories is of vital importance are not without their shortcomings. Their very nature forces
as the holding of inventories can cost anywhere between 20 these problems to be of a very large scale. They are often
to 40 per cent of their value. difficult to solve to optimality. Furthermore, most of the
Transportation Decisions: These decisions are closely models in this category are largely deterministic and static
linked to the inventory decisions, since the best choice of in nature. Additionally, those that consider stochastic elements
mode is often found by trading off the cost of using the are very restrictive in nature. In sum, there does not seem to
particular mode of transport with the indirect cost of yet be a comprehensive model that is representative of the
inventory associated with that mode. While air shipments true nature of material flows in the supply chain.
may be fast, reliable, and warrant lesser safety stocks, they Rough Cut Methods: This method deals with the
are expensive. Meanwhile shipping by sea or rail may be operational decisions of supply chain management. This
much cheaper, but they necessitate holding relatively large model usually assume a single site of operation in a network
amounts of inventory to buffer against the inherent and add supply chain characteristics to it, such as considering
uncertainty associated with them. Therefore customer service the site’s relation to the others in the network.
levels and geographic location play vital roles in such These models form the bulk of the supply chain literature,
decisions. Since transportation is more than 30 per cent of and typically deal with the more operational decisions. Most
the logistics costs, operating efficiently makes good of the integrative research (from a supply chain context) in
economic sense. Shipment sizes, routing and scheduling of the literature seems to take on an inventory management
equipment are key in effective management of the firm’s perspective. In fact, the term “Supply Chain” first appears
transport strategy. in the literature as an inventory management approach. The
thrust of the rough cut models is the development of
5. SUPPLY CHAIN MODELLING APPROACHES inventory control policies, considering several levels or
Depending on the different perspectives required by the two echelons together. These models have come to be known as
levels of decisions there are two basic areas of modelling “multi-level” or “multi-echelon” inventory control models.
approaches to supply chain management. The strategic
6. PROBLEMS OF SCM
decisions have a global scope. They try to combine various
aspects of the supply chain. As a result, the models that The aim of supply chain management is to provide a smooth
describe these decisions are of a larger magnitude, and flow of high quality, relevant information that will enable
require a considerable amount of data. These models provide suppliers to provide an uninterrupted and precisely timed
approximate solutions to the described decisions due to the flow of materials to customers. However, unplanned demand
vast amount of data requirements, and the broad scope of oscillations, including those in the supply chain execution
decisions. Operational decisions address the day to day process can create problems throughout the supply chain.
operations of the supply chain. Hence, the models describing Supply chain management must address the problems
them are often very specific in nature. Due to their narrow regarding the following fields:
perspective, these models often consider great detail and Distribution Network Configuration: It deals with the
provide very good, if not optimal, solutions to the operational number and location of suppliers, production facilities,
decisions. distribution centres, warehouses, and potential customers.
100 International Journal of Logistics and Supply Chain Management

Distribution Strategies: These involve delivery between various departments in order to get the product to
schemes, i.e., the path of shipment; mode of transportation, reach the end customer. Information technology enables
e.g., including truckload, rail road, ocean freight, airfreight; organizations to avail good information easily and efficiently
and transportation control, e.g., owner-operated, private or which helps to coordinate the activities required to manage
contract carrier. the supply chain. The cost of information has considerably
Information: It involves integration of processes decreased with developments in the IT sector. In the
throughout the supply chain to share efficient information development and maintenance of supply chain’s information
which basically include demand, forecasts, inventory, systems both software and hardware must be addressed.
transportation, potential collaboration, etc. Hardware includes computer’s input/output devices and
Inventory Management: This deals with location of storage media. Software includes the entire system and
inventory, capacity of inventory, including raw materials, application programme used for processing transactions
semi-finished and finished goods. management control, decision-making and strategic
Cash Flow: This deals with arranging the payment planning. In the future strategic and technological
methods for exchanging funds within the supply chain. innovations in supply chain will impact on how organizations
The basic concept of supply chain management is that buy and sell products. However clear vision, strong planning
customers order product from an organization; the and technical insight into the Internet’s capabilities would
organization keeps track of what it is selling; and it orders be necessary to ensure that companies maximize the
enough raw material from its suppliers to meet the customer Internet’s potential for better supply chain management and
demands. However, when there is any lack of coordination, ultimately improved competitiveness.
it turns out to be a problem; because each group (whether it Warehousing: Warehouses are the facilities in the supply
is the suppliers, manufacturers, sales department, customers) chain where goods are stored. Warehousing affects customer
can influence the entire chain by ordering too much or too service levels, stock-out rates, sales and marketing success.
little. Also the decisions made by each group affect each Warehouses act as a bridge between the upstream members
other. This lack of coordination coupled with the ability to of the supply chain and the downstream members of the
influence while being influenced by others leads to what is supply chain. Functions of warehousing can be categorized
known as the “Bullwhip Effect”. For instance, a distributor’s into economic benefits and service benefits. The economic
decision to chase highly seasonal demand may “bullwhip” benefits include consolidation, cross-docking, processing/
its upstream partners, causing significant cost overruns.
postponement, and stock piling. The service benefits that
Bullwhip Effect: This effect can be reduced by providing
can be achieved through warehousing are stock spotting,
better information (improved communication along the
stock mixing, production, and support and market presence.
supply chain or better forecasts) in order to increase
Retail Industry: In order to manage supply chains it
coordination between groups. To minimize the Bullwhip
requires retailers to perform a delicate balancing act that
Effect one needs to specifically understand what actually
simultaneously meets multiple needs. While delivering high
drives the customer demands and inventory consumption as
service levels as they manage global supply chains, retailers
they are the aspects which trigger the replenishment orders
must keep costs low in order to remain competitive. Other
at various points in the supply chain. Organizations need to
overcome the causes of fluctuations between the demands pressures come from more demanding consumers as well as
and supply by studying the potential customer needs. They from the increasingly global nature of the industry, which
should aim to eliminate delays along the supply chain. has retailers both sourcing and selling products in more
Cutting the order to delivery time will consequently reduce places around the world. For instance, Wal-Mart said, “retail
supply chain fluctuations. is about supply chain management, about having products
on the shelf that people want and when they want them. It
7. APPLICATIONS OF SCM really doesn’t matter whether you have fashion in your store,
Enterprise Resource Planning (ERP): ERP refers to a you just have to have what people want at the best prices
systematic computerized process of integrating all the and they’ll come”.
functions and departments of an organization in an efficient Health care: An integrated Supply Chain Management
network. ERP helps to cut down costs, improve the quality (SCM) for healthcare solution enables lower fulfilment costs,
of working time, make maximum use of technological shorter delivery lead times and improves ability to focus on
advancements, increases the ability to respond to a query service delivery rather than administrative processes.
by determining the status of product delivery. Thus, ERP Healthcare organizations today are looking for opportunities
cuts down laborious time consuming processes and increases to improve operational efficiencies and reduce costs without
coordination and efficiency of an organization. For instance, negatively impacting patient care. Creating a supply chain
integration of ERP in SCM it helps to overcome problems that connects employees in the medical facility, fosters
like bullwhip effect. collaboration and offers supplier’s visibility into demand-
Information Technology (IT): Supply chain management and-supply is essential to reducing overall supply chain costs.
is concerned with the flow of products and information SCM helps to: reduce procurement costs, reduces cost by
 Supply Chain Management: An Overview 101

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