5

Supply Chain Value

Ahmed Ata Khan

Stages of a Supply Chain
Objective of Supply Chain
 Supply Chain Surplus =
 Consumer Value –
 Supply Chain Cost
 The value of the final product may vary for each
customer and can be estimated by the maximum
amount the customer is willing to pay for it.
 The difference between the value of the product and
its price remains with the customer as consumer
surplus.
 The rest of the supply chain surplus becomes supply
chain profitability, the difference between the
revenue generated from the customer and the overall
cost across the supply chain.
Detergent Supply Chain
Value of a Supply Chain
For any supply chain, there is only one
source of revenue:
The Customer
The value obtained by a customer
purchasing detergent at Wal-Mart depends
upon several factors:
◦ The competitive price of the detergent
◦ The functionality of the detergent
◦ How far the customer has to travel to Wal-Mart
◦ The likelihood of finding the detergent in stock
Effectiveness of a Supply Chain
 The customer is the only one providing positive cash flow
for the Wal-Mart 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.
 The appropriate management of these flows is a key to
supply chain success.
 Effective supply chain management involves the
management of supply chain assets and product, information,
and fund flows to maximize total supply chain surplus.
Importance of Supply Chain Decisions
Wal-Mart Example
 There is a close connection between the design and
management of supply chain flows (product, information, and
funds) and the success of a supply chain.
 Wal-Mart has been a leader at using supply chain design,
planning, and operation to achieve success.
 From its beginning, the company invested heavily in
transportation and information infrastructure to facilitate the
effective flow of goods and information.
 Wal-Mart designed its supply chain with clusters of stores
around distribution centers to facilitate frequent replenishment
at its retail stores in a cost-effective manner.
 Frequent replenishment allows stores to match supply and
demand more effectively than the competition.
 Wal-Mart has been a leader in sharing information and
collaborating with suppliers to bring down costs and improve
Seven-Eleven Japan Example
 Seven-Eleven Japan is another example of a
company that has used excellent supply chain design,
planning, and operation to drive growth and
profitability.
 It has used a very responsive replenishment system
along with an outstanding information system to
ensure that products are available at each of its
convenience stores to match customer needs.
 It’s responsiveness allows it to change the
merchandising mix at each store by time of day to
precisely match customer demand.
 As a result, the company has grown from sales of 1
billion yen in 1974 to almost 3 trillion yen in 2009
DELL Example
 Dell is another example of a company that enjoyed
tremendous success based on its supply chain design,
planning, and operation but then had to adapt its supply chain
in response to shifts in technology and customer expectations.
 Between 1993 and 2006, Dell experienced an unprecedented
growth of both revenue and profits by structuring a supply
chain.
 This success was based on two key supply chain features that
supported rapid, low-cost customization.
 The first was Dell’s decision to sell directly to the end
customer, bypassing distributors and retailers.
 The second key aspect of Dell’s supply chain was the
centralization of manufacturing and inventories in a few
locations where final assembly was postponed until the
customer order arrived.
Decision Phases in a Supply Chain

1. Supply Chain Strategy or Design

◦ During this phase, 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.
Decision Phases in a Supply Chain

2. Supply Chain Planning

◦ For decisions made during this phase, the time frame
considered is a quarter to a year.
◦ Therefore, the supply chain’s configuration determined in
the strategic phase is fixed.
◦ This configuration establishes constraints within which
planning must be done.
◦ 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.
◦ 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
Decision Phases in a Supply Chain
3. Supply Chain Operation
◦ 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.
◦ Given the constraints and planning policies, the goal during
the operation phase is to exploit the reduction of uncertainty
and optimize performance.
Supply Chain Macro Processes in a Firm
All supply chain processes discussed in the two process views and
throughout this book can be classified into the following three
macro processes, as shown :
1. Customer Relationship Management (CRM): all processes that
focus on the interface between the firm and its customers
2. Internal Supply Chain Management (ISCM): all processes that
are internal to the firm
3. Supplier Relationship Management (SRM): all processes that
focus on the interface between the firm and its suppliers
Supply Chain Macro Processes in a Firm
These three macro processes manage the flow of information,
product, and funds required to generate, receive, and fulfill a
customer request.
The CRM macro process aims to generate customer demand and
facilitate the placement and tracking of orders. It includes processes
such as marketing, pricing, sales, order management, and call center
management.
The ISCM macro process aims to fulfill demand generated by the
CRM process in a timely manner and at the lowest possible cost.
ISCM processes include the planning of internal production and
storage capacity, preparation of demand and supply plans, and
fulfillment of actual orders.
The SRM macro process aims to arrange for and manage supply
sources for various goods and services. SRM processes include the
evaluation and selection of suppliers, negotiation of supply terms,
and communication regarding new products and orders with
Quiz on 19 January,
from Chapters 4 & 5

Best of Luck