Supply Chain

Management
• What is a Supply Chain?
• Decision Phases in a Supply Chain
• Process View of a Supply Chain
• The Importance of Supply Chain Flows
• Supply Chain Drivers
 What is a Supply Chain?
• All stages involved, directly or indirectly, in
fulfilling a customer request

• Includes movement of products from

suppliers to manufacturers to distributors,
but also includes movement of
information, funds, and products in both
directions
• Customer is an integral part of the supply
chain
• Typical supply chain stages:
▪ Customers,
▪ Retailers,
▪ Distributors,
▪ Manufacturers,
▪ Suppliers

• All stages may not be present in all supply

chains
Supply Chain
 Customer wants
P&G or other Third
Wholesaler detergent and goes to
manufacturer party DC
Local Shopkeeper

Chemical
Plastic
Packaging manufacturer
Producer
(e.g. Oil Company)

Chemical
Paper Timber
manufacturer
Manufacturer Industry
(e.g. Oil Company)
 Flows in a Supply Chain

Information

Product
Supply Chain Customer
Funds
The Objective of a Supply Chain
• Maximize overall value created
• Supply chain value:
• Difference between what the final product is
worth to the customer and the effort the supply
chain expends in filling the customer’s request
• Value is correlated to supply chain profitability
(difference between revenue generated from
the customer and the overall cost across the
supply chain)
The Objective of a Supply Chain
• Supply chain profitability is total profit to be
shared across all stages of the supply
chain
• Supply chain success should be measured
by total supply chain profitability, not
profits at an individual stage
• Sources of supply chain revenue:
Customer
• Sources of supply chain cost: Flows of
Information, Products, or Funds
between Stages of the Supply Chain

• Supply chain management is the

management of flows between and
among supply chain stages to maximize
total supply chain profitability
 Decision Phases of a Supply
Chain
• Supply chain strategy or design
• Supply chain planning
• Supply chain operation
 Supply Chain Strategy or Design
• Decisions about the structure of the supply chain and
what processes each stage will perform

• Strategic supply chain decisions

– How Resources will be allocated
– Locations and capacities of facilities
– Products to be made or stored at various locations
– Modes of transportation
– Information systems

• Supply chain design must support strategic

objectives
• Supply chain design decisions are long-term and
expensive to reverse – must take into account
market uncertainty
 Supply Chain Planning
• Decide on a set of policies that govern short-term
operations
• Fixed by the supply configuration from previous phase
• Starts with a forecast of demand in the coming year
• Planning decisions:
– Which markets will be supplied
– from which locations
– Planned buildup of inventories
– Subcontracting,
– Backup locations
– Inventory policies
– Timing and size of market promotions
• Must consider in planning decisions demand uncertainty,
exchange rates, competition over the time horizon
 Supply Chain Operation
• Goal is to implement the operating policies as
effectively as possible
• Time horizon is weekly or daily
• Decisions about SC Operations
– regarding individual customer orders
– Allocate orders to inventory or production,
– set order due dates,
– generate pick lists at a warehouse,
– allocate an order to a particular shipment,
– set delivery schedules,
– place replenishment orders
• Much less uncertainty (short time horizon)
Process Views of a Supply Chain
• Cycle view:
Processes in a supply chain are divided into a
series of cycles, each performed at the interfaces
between two successive supply chain stages
• Push/Pull view:
Processes in a supply chain are divided into two
categories depending on whether they are
➢ executed in response to a customer order (pull) or
➢ in anticipation of a customer order (push)
Cycle View of Supply Chains
Customer
Customer Order Cycle

Retailer
Replenishment Cycle

Distributor

Manufacturing Cycle

Manufacturer
Procurement Cycle
Supplier
 Cycle View of a Supply Chain
• Each cycle occurs at the interface between two
successive stages
• Customer order cycle (customer-retailer)
• Replenishment cycle (retailer-distributor)
• Manufacturing cycle (distributor-manufacturer)
• Procurement cycle (manufacturer-supplier)
• Cycle view clearly defines processes involved and
the owners of each process. Specifies the roles and
responsibilities of each member and the desired
outcome of each process.
 Push/Pull View of
Supply Chain Processes
• Supply chain processes fall into one of two
categories depending on the timing of their
execution relative to customer demand
• Pull: execution is initiated in response to a
customer order (reactive)
• Push: execution is initiated in anticipation of
customer orders (speculative)
• Push/pull boundary separates push
processes from pull processes
 Push/Pull View of
Supply Chain Processes
• Useful in considering strategic decisions
relating to supply chain design – more
global view of how supply chain processes
relate to customer orders
• Can combine the push/pull and cycle
views
• The relative proportion of push and pull
processes can have an impact on supply
chain performance
 Push/Pull View of Supply
Chains
Procurement, Customer Order
Manufacturing and Cycle
Replenishment cycles

PUSH PROCESSES PULL PROCESSES

Customer
Order Arrives
 Supply Chain Macro Processes
in a Firm
• Supply chain processes discussed in the
two views can be classified into :
– Customer Relationship Management (CRM)
– Internal Supply Chain Management (ISCM)
– Supplier Relationship Management (SRM)
• Integration among the above three macro
processes is critical for effective and
successful supply chain management
 Drivers of Supply Chain
Performance
• Facilities
• Inventory
• Transportation
• Information
• Sourcing
• Pricing
 Drivers of Supply Chain Performance
• Facilities
– places where inventory is stored, assembled, or fabricated
– production sites and storage sites
• Inventory
– raw materials, WIP, finished goods within a supply chain
– inventory policies
• Transportation
– moving inventory from point to point in a supply chain
– combinations of transportation modes and routes
• Information
– data and analysis regarding inventory, transportation, facilities
throughout the supply chain
– potentially the biggest driver of supply chain performance
• Sourcing
– functions a firm performs and functions that are outsourced
• Pricing
– Price associated with goods and services provided by a firm to the
supply chain
A Framework for Structuring Drivers

Competitive Strategy

Supply Chain
Strategy
Efficiency Responsiveness
Supply chain structure

Logistical Drivers

Facilities Inventory Transportation

Information Sourcing Pricing

Cross Functional Drivers

 Facilities
• Role in the supply chain
– the “where” of the supply chain
– manufacturing or storage (warehouses)
• Role in the competitive strategy
– economies of scale (efficiency priority)
– larger number of smaller facilities
(responsiveness priority)
 Components of Facilities Decisions
• Location
– centralization (efficiency) vs. decentralization
(responsiveness)
– other factors to consider (e.g., proximity to customers)
• Capacity (flexibility versus efficiency)
• Manufacturing methodology (product focused versus
process focused)
• Warehousing methodology (SKU storage, job lot
storage, cross-docking)
• Overall trade-off: Responsiveness versus efficiency
 Inventory
• Role in the supply chain
• Role in the competitive strategy
• Components of inventory decisions
Inventory: Role in the Supply Chain
• Inventory exists because of a mismatch
between supply and demand
• Source of cost and influence on
responsiveness
• Impact on
– material flow time: time elapsed between when
material enters the supply chain to when it exits
the supply chain
– Throughput rate at which sales to end consumers
occur
I = RT (Little’s Law)
I = inventory; R = throughput; T = flow time
 Inventory: Role in Competitive Strategy

• If responsiveness is a strategic
competitive priority, a firm can locate
larger amounts of inventory closer to
customers
• If cost is more important, inventory can be
reduced to make the firm more efficient
• Trade-off
Components of Inventory Decisions
• Cycle inventory
– Average amount of inventory used to satisfy demand between
shipments
– Depends on lot size
• Safety inventory
– inventory held in case demand exceeds expectations
– costs of carrying too much inventory versus cost of losing sales
• Seasonal inventory
– inventory built up to counter predictable variability in demand
– cost of carrying additional inventory versus cost of flexible
production
• Overall trade-off: Responsiveness versus efficiency
– more inventory: greater responsiveness but greater cost
– less inventory: lower cost but lower responsiveness
 Transportation
• Role in the supply chain
• Role in the competitive strategy
• Components of transportation decisions
 Transportation: Role in the Supply Chain

• Moves the product between stages in the

supply chain
• Impact on responsiveness and efficiency
• Faster transportation allows greater
responsiveness but lower efficiency
• Also affects inventory and facilities
 Transportation: Role in the Competitive
Strategy
• If responsiveness is a strategic
competitive priority, then faster
transportation modes can provide greater
responsiveness to customers who are
willing to pay for it
• Can also use slower transportation modes
for customers whose priority is price (cost)
• Can also consider both inventory and
transportation to find the right balance
 Components of Transportation Decisions

• Mode of transportation:
– air, truck, rail, ship, pipeline, electronic
transportation
– vary in cost, speed, size of shipment, flexibility
• Route and network selection
– route: path along which a product is shipped
– network: collection of locations and routes
• In-house or outsource
• Overall trade-off: Responsiveness versus
efficiency
 Information
• Role in the supply chain
• Role in the competitive strategy
• Components of information decisions
 Information: Role in the Supply Chain

• The connection between the various

stages in the supply chain – allows
coordination between stages
• Crucial to daily operation of each stage in
a supply chain – e.g., production
scheduling, inventory levels
 Information:
Role in the Competitive Strategy
• Allows supply chain to become more
efficient and more responsive at the same
time (reduces the need for a trade-off)
• Information technology
• What information is most valuable?
 Components of Information Decisions
• Push (MRP) versus pull (demand information
transmitted quickly throughout the supply chain)
• Coordination and information sharing
• Forecasting and aggregate planning
• Enabling technologies
– EDI
– Internet
– ERP systems
– Supply Chain Management software
• Overall trade-off: Responsiveness versus
efficiency
 Sourcing
• Role in the supply chain
• Role in the competitive strategy
• Components of sourcing decisions
 Sourcing: Role in the Supply Chain

• Set of business processes required to

purchase goods and services in a supply
chain
• Supplier selection,
• single vs. multiple suppliers,
• contract negotiation
 Sourcing:
Role in the Competitive Strategy
• Sourcing decisions are crucial because
they affect the level of efficiency and
responsiveness in a supply chain
• In-house vs. outsource decisions-
improving efficiency and responsiveness
Components of Sourcing Decisions
• In-house versus outsource decisions
• Supplier evaluation and selection
• Procurement process
• Overall trade-off: Increase the supply
chain profits
 Pricing
• Role in the supply chain
• Role in the competitive strategy
• Components of pricing decisions
 Pricing: Role in the Supply Chain

• Pricing determines the amount to charge

customers in a supply chain
• Pricing strategies can be used to match
demand and supply
 Pricing:
Role in the Competitive Strategy
• Firms can utilize optimal pricing strategies
to improve efficiency and responsiveness
• Low price and low product availability; vary
prices by response times
 Components of Pricing Decisions
• Pricing and economies of scale
• Everyday low pricing versus high-low
pricing
• Fixed price versus menu pricing
• Overall trade-off: Increase the firm profits