Reference Material for

SCM Pro

Module 1
Essentials of Supply Chain Management
 Reference Material for SCM Pro

Disclaimer

The Contents presented here are for the sole purpose of reference for SCM
Pro Certification program by the CII Institute of Logistics subject to the­
condition that it shall not by way of trade or otherwise circulated in any
form or used without the Cll's prior consent.

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Table of Contents:
ESSENTIALS OF SUPPLY CHAIN MANAGEMENT
1. SUPPLY CHAIN MANAGEMENT CONCEPTS ............ 5
1.1 Supply Chain Management: Definition............................... 5

1.2 Logistics Vs. Supply Chain ............................................... 19

1.3 An Evolutionary View ................................................... 20

1.4 Drivers of Supply Chain Management .............................. 21

1.5 Supply Chain for Competitive Advantage .................... 22

1.6 Supply Chains impacting top line and bottom line........23

1.7 Responsive and Efficient Supply Chains ...................... 24

1.8 Collaboration and Integration - Key to Supply Chain .... 26

1.9 Collaborative Planning, Forecasting and Replenishment....

(CPFR) .................................................................................... 30

2. MANAGEMENT OF SUPPLY CHAINS ......................33

2.1 Performance measures - Introduction ............................. 33

2.2 Types of Performance Measures .....................................34

2.3 Supply chain performance Measurement Criteria ........ 38

2.4 Performance measurement techniques- BSC ………………

Benchmarking ............................................................ 40

2.5 Formulation of Metrics ................................................. 56

2.6 Function based Approaches in …………………………………

Supply Chain Performance Measures .............................. 59

2.7 Process view of Supply Chain - Integrated measures ... 61

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2.8 Performance measures for Collaboration ………………...69

2.9 The Supply Chain Council's SCOR Model.......................... 70

3. GREEN SUPPLY CHAINS ................................................ 71

3.1 Green House Gases (GHG) ................................................ 72

3.2 lnventorization of Green House Gases ........................... 78

3.3 Direct and indirect emissions .......................................... 82

3.4 The concept of "Scope" ................................................... 82

3.5 Greening The Supply chains ........................................... 85

3.6 Internal management for GSCM ..................................... 87

3.7 GSCM success stories........................................................ 89

4. Supply Chain Risk Management ............................. 91

4.1 Drivers/ Sources of risks in Supply Chains ......................... 92

4.2 Documented Cases ........................................................ 94

4.3 Supply chain risk management. ...................................... 96

4.4 Risk Value ........................................................................... 99

4.5 Risk Management Methods .......................................... 100

GLOSSARY ……………………………………………………. 121

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1. SUPPLY CHAIN MANAGEMENT CONCEPTS

1.1 Supply Chain Management: Definition
Supply Chain Management envelops all activities starting from
point of origin through point of consumption till End of Life of the
Product or Service. It includes Planning and execution part of
satisfying the customers' demand.

Supply Chain definition: The movement of materials as they flow

from their source to the end customer. Supply Chain includes
purchasing, manufacturing, warehousing, transportation,
customer service, demand planning, supply planning and Supply
Chain management. According to Beamon (1998), a supply chain
is" an integrated manufacturing process wherein raw materials are
converted into finished products, then delivered to customers':

Little (1999) defines a supply chain as "the integrated and

coordinated flows of goods from source to destination, as well as
the information and money flows that are associated with it':

A supply chain is defined by Chow & Heaver (1999) as "the

collection of all producers, suppliers, distributors, retailers and
transportation, information and other logistics providers that are
involved in providing goods to end consumers. A supply chain
includes both the internal and external participants for the firm'

Ayers (2001) defines a supply chain as "life cycle processes

comprising physical, information, financial and knowledge flows
whose purpose is to satisfy end-user requirements with products
and services from multiple, linked suppliers' Mentzer et al. (2001)
defines a supply chain as "a set of three or more entities
(organisations or individuals} directly involved in the upstream
(i.e. supply) and downstream (i.e. distribution) flows of products,
services, finances, and/or information from a source to a customer

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Supply chain is defined by tecc.com.au (2002) as "a chain or progression

beginning with raw materials and ending with the sale of the finished
product'

Bridge field Group (2006) defines a supply chain as"a linked set of
resources and processes that begins with the sourcing of raw
materials and extends through the delivery of end items to the final
customer'

Grant et al. (2006) define supply chain management as "the

integration of business processes from end user through original
suppliers that provides products, services and information that add
value for customers'

Pienaar (2009) defines a supply chain as "a generic description of

the process integration involving organisations to convert raw
materials into finished products and to convey them to the end-user'

The Supply Chain Forum defines supply chain management as

follows: "Supply chain management is the integration of key
business processes from end user through original suppliers that
provide products, services and information that add value for
customers and other stakeholders' According to the Council of
Supply Chain Management Professionals (CSCMP) (2009),
"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'
Supply Chain Management - Boundaries and Relationships
Supply chain management is an integrating function with primary
responsibility for linking major business functions and business
processes within and across companies into a cohesive and high-
performing business model. It includes all of the logistics
management activities noted above, as well as manufacturing
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operations, and it drives coordination of processes and activities

with and across marketing, sales, product design, finance, and
information technology.

CSCMP's Definition of Logistics Management

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.

Manufacturer Dlstributar Retail consumer

Fig: 1 A typical structure of Supply chain

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Fig 2. Supply Chain Pictorial Representation

Supply chain management essentially ensures three flows:

a. Product flow/ Service Flow

b. Information flow
c. Finance flow
The product flow is the movement of goods from supplier to customers and
customer to manufacturer in case of any customer returns or service
requirements.

The information flow covers updating the status of the delivery as well as
sharing information between suppliers and manufacturers. Information
flow is supposed to happen on a real time basis, without any distortion
and delay to ensure demand is met with correct supplies. The information
flow in the supply chain includes the market signaling amongst the sup­
ply chain members regarding end-user preferences

The finance flow is the result of first two flows that encompasses credit
terms, payment schedules and consignment and title ownership arrange­
ments.

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Upstream & Downstream The focal company is at the centre, the

suppliers' side is called Upstream. Finished Goods from the focal company
is distributed to the customers which is called as Downstream. The supply
chain includes managing information systems, sourcing and procurement,
production scheduling, order processing, inventory management,
warehousing, customer service, and after-market disposition of packaging
and materials. The supplier network consists of all organizations that supply
inputs, either directly or indirectly, to the focal firm. In the automotive Supply
chain, supplier network includes the thousands of firms that provide items
ranging from raw materials such as steel and plastics, to complex
assemblies and subassemblies such as transmissions and brakes. The
supplier network essentially to include internal divisions of the company as
well as external suppliers.

A given material will pass through multiple processes within multiple sup­
pliers and divisions before being assembled into a vehicle. Referring Fig
1, an Automotive Supply chain can be visualized as a long chain with a
number of Suppliers, storage Warehouses, dealers etc. The Manufacturer,
the Original Equipment Manufacturer (OEM) is at the center, designs and
produces many of the parts in-house, and the other parts are produced by
a variety of Tier 1 suppliers. Tier 1 suppliers in turn, procure components
and raw materials from the next level suppliers called Tier 2 suppliers. As­
sembled and tested automobiles are distributed to the customers through
a distribution network comprising of Dealers, Regional Sales Depots/of­
fices, parking Yards and Showrooms. Service and Spare parts supply is an
important activity for an Automotive Supply Chain. Owned and franchised
dealers, Multi-brand dealers, Small garages/ gas stations provide the nec­
essary after Sales service and Spare parts to the customers.

The beginning of a supply chain inevitably can be traced back to “Mother

Earth” ‘that is, the ultimate original source of all materials that flow through
the chain (e.g., iron ore, coal, petroleum, wood, etc.). An important recent
trend in supply chain management is the recovery, recycling, or reuse of
products from the end user which is named as Reverse Supply chain.

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Supply chains are essentially a series of linked suppliers and customers;

every customer is, in turn, a supplier to the next downstream organization
until a finished product reaches the end user.

From the focal firm's perspective, the supply chain includes upstream sup­
pliers, internal functions, and downstream customers. A firm's internal
functions include the different processes used in transforming the inputs
provided by the supplier network. In the case of an automobile company,
this includes all of its parts manufacturing (e.g., stamping, power train,
and components), which are eventually brought together in actual auto­
mobiles. Coordinating and scheduling these internal flows is challenging,
particularly in a large organization such as an automotive company.

Car manufacturers like Maruti Udyog Ltd or Hyundai produce cars in huge
volumes and variety. The takt time (time between two successive cars) in
their final assembly line is less than a minute, which means a finished car
rolls out in less than a minute. Considering huge variants of cars, in dif­
ferent colour combinations and every car requiring thousands of compo­
nents, the Supply chain for automobiles is a complex one.

For example, order-processing managers are responsible for translating

customer requirements into actual orders, which are put into the system. In
the case of an automotive company, these individuals work primarily with
the extensive dealer network to ensure that the right mix of automobiles and
service parts are available so that dealers can meet the needs of their
customers. Order processing also may involve extensive customer
interaction, including quoting prices, discussing delivery dates and other
shipment requirements, and after-market service. Another important internal
function is production scheduling, which translates orders into actual
production tasks. This may involve working with materials requirements
planning (MRP) systems, scheduling work centers, employees, capacity
planning, and machine maintenance The second major part of supply chain
management involves upstream external supply chain members. In order to
manage the flow of materials between all of the upstream organizations in
a supply chain, firms employ an array of personnel who ensure that the right
materials arrive at

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the right locations at the right time. The purchasing function serves as the
critical interface with the upstream supplier. Purchasing managers are re­
sponsible for ensuring that: 1) the right suppliers are selected; 2) suppliers
are meeting performance expectations; 3) appropriate contractual mech­
anisms are employed; and 4) an appropriate relationship is maintained
with all suppliers. They may also be responsible for driving improvement
in the supply base and acting as liaisons between suppliers and other in­
ternal members (engineering, accounting, etc.). Materials managers are
responsible for planning, forecasting, and scheduling material flows be­
tween suppliers in the chain. Materials managers play an important role
coordinating a wide range of activities. Materials managers work closely
with production schedulers to ensure that suppliers are able to deliver the
materials on time to the required locations, and that they have some vis­
ibility regarding future requirements so that they can plan ahead of actual
production and delivery dates.

Finally, a firm's external downstream supply chain encompasses all of the

downstream organizations, processes, and functions that the product
passes through on its way to the end customer. In the case of an automo­
tive company's distribution network, this includes its finished goods and
pipeline inventory, warehouses, dealer network, and sales operations. The
distribution Channel of Automotive Supply chain is relatively small
whereas for a retail supply chain, the length and breadth is very high to
reach millions of consumers.

All organizations are part of one or more supply chains. Whether a com­
pany sells directly to the end customer, provides a service, manufactures a
product, or extracts material from the earth, it can be characterized within
the context of its supply chain. Until recently, however, organizations fo­
cused on their direct customers and internal functions and placed rela­
tively little emphasis on other organizations within their supply chain net­
work.Three major developments in global markets and technologies have
brought supply chain management to the forefront of executive manage­
ment's attention:

1. Ever-increasing customer demands in areas of product and

service cost, quality, delivery, technology, and cycle time brought
\ about by global competition.
2. The emergence of and greater acceptance of higher-order
cooperative inter-organizational relationships.

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3. The information revolution.

Example Supply Chains

For an Auto Manufacturer like TATA Motors, companies like Delphi TVS,
Rane TRW, Lucas TVS etc., who supply the major aggregates (assemblies)
will be Tier 1 Suppliers.

Tier 1 supplier, Delphi TVS is supplying Fuel Injection Systems to TATA Mo­
tors, in the next level, Delphi TVS buys few components like machined
Casting & Forgings from Geekay Auto Components Company, who can be
called as Tier 2 Supplier.

Geekay Auto Components Company, Tier 2 Supplier will procure the raw
material needed for their castings from JSW Steels, the Tier 3 Supplier. JSW
steels will procure iron and coke from iron ore mine.

A typical Automotive Supply Chain has number of tiers of Suppliers for each
and every component, since the variety of vehicles manufactured is very
high.

A Garment Supply chain

Reverse Logistics: Reverse logistics includes all of the activities that are
mentioned in the definition of Logistics above. The difference is that re­
verse logistics encompasses all of these activities as they operate in re­
verse direction. Therefore, reverse logistics can be defined as:

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The process of planning, implementing, and controlling the efficient, cost

effective flow of raw materials, in-process inventory, finished goods and
related information from the point of consumption to the point of origin
for the purpose of recapturing value or proper disposal.

Reverse logistics is the process of moving goods from their typical final
destination for the purpose of capturing value, or proper disposal.

Remanufacturing and refurbishing activities also may also be included in

the definition of reverse logistics. Reverse logistics is more than reusing
containers and recycling packaging materials like collecting empty gas
cylinders or collecting back the Recyclable Glass Bottles (RGBs) of Pepsi or
Coca-Cola glass bottles.

In nutshell, reverse logistics is all about, how the firm should effectively
and efficiently get the products from where they are not wanted to where
they can be processed, reused, and salvaged. Also, the firm must deter­
mine the "disposition" of each product.

Hence, core activities involved in reverse logistics are : Return to Supplier,

Resell, Sell via special Outlets, Salvage , Recondition, Refurbish, Remanu­
facture, Reclaim Materials, Recycle and Landfill etc.,

It is a common practice to reuse packaging materials. Clearly, reusable

totes and pallets will be used many times before disposal. Often, damaged
totes and pallets can be refurbished and returned to use.

Reasons for Product Returns :

The reasons for a customer returning a product can be categorized under

the following three headings:

Manufacturing returns - quality-control rejections, raw material surplus,

production leftovers or by-products
Distribution returns - product recalls for replacements, commercial re­ turns
(unsold products and wrong or damaged deliveries), stock balancing returns

Customer returns - reimbursement guarantee returns, warranty returns,

service returns, end-of-use, end-of-life returns, recalls

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The latter two are related to retailers and manufacturers. The first one is
closely related to manufacturer and supplier.
Specific Example: Fast moving consumer goods

'Fast moving consumer goods' (FMCG) are products that have a quick
turnover and relatively low cost ones, generally including toiletries, soaps,
cosmetics, teeth-cleaning products like tooth paste and brushes, shaving
products and detergents, as well as other non-durables such as glassware,
bulbs, batteries, paper products and plastic goods. The factors reported as
causing product returns for FMCG retailers are:

Forecast accuracy and demand variability - imbalances between fore­

casted demand and market demand that leads to a stock-out situation, or
overstocking of goods which will have to be returned.

Promotional activities - overstocking can result from sales of limited pe­

riod discounted items, 'Buy one get one free' offers, etc.

New product introduction - it is often difficult to forecast the success of

new products, and overstocking may result if this is over-assessed.

Product range and safety stock policy- to meet consumer expectations of

variety and choice, companies tend to provide a wide range of stock keeping
units (SKUs), and there is inevitably overstocking of some SKUs.

Product life cycles - short product life cycles, especially in the electron­
ics (like mobile phones)and high-tech market can provide a competitive
advantage, but may lead to high levels of product returns if not managed
appropriately.

Logistics trade-offs - the cost of manufacturing and logistics are relatively

low compared to lost revenue from not having shelf availability can lead
to excessive stock holding. This has close relation to 'opportunity' costs.

Purchasing policies - products are often purchased ahead of seasonal

demand to minimise the prices paid for goods, which can affect the logis­
tics processes within the supply chain.

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High on-shelf availability - consumer expectations and the wish for

stock to be continuously available can lead to problems of overstocking,
resulting in greater levels of returns.

Legislative factors - discussed above, producers and retailers are likely to

have to take back products they sell post-consumer use. It becomes social
responsibility of companies to take back their products after its productive
usage.

Cash flow management - retailers may take advantage of existing agree­

ments regarding the return of goods to suppliers or manufacturers in ex­
change for credit, in order to ease their cash-flow position.

Liberal returns policies - typically for defective goods, such policies

result in damaged or non-resalable stock being returned to the retailer,
which then has to be disposed off appropriately.

Customer'no-faults found' - high levels of products are returned by cus­

tomers who are unable to follow the instruction manual, who then assume
there is a fault with the product.
Can Reverse Logistics become a Strategic Weapon...

Managing reverse logistics challenges effectively, is an essential, strategic

capability.

Johnson & Johnson had to recall one of its flagship products. Johnson &
Johnson was prepared with a fine-tuned reverse logistics system and was
immediately able to cleanse the channel of any possibly tainted product.
Because Johnson & Johnson acted so quickly and competently, a mere
three days after the crisis, an all-time high record sales had happened. Un­
doubtedly, the public would not have responded so positively had John-
son & Johnson not been able to quickly and efficiently handle its recalled
product through its existing system in reverse. This incident illustrates how
reverse logistics capabilities can be strategic, and how they can dramati­
cally impact the firm.

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A goal of almost every business is to retain the customers so that they will
not move to another supplier. An important service a supplier can offer to
its customers is the ability to take back unsold or defective, used and obso­
lete merchandise quickly, and credit the customers in a timely manner.

Firms in short product life cycle and high obsolescence product catego­
ries-such as mobile phones, Television sets, electronics, home appliances
should have a strong reverse logistics program. Given the competitive
pressure on such product firms, bottom line contributions provided by good
reverse logistics programs are important to the firms' overall profit­ ability.
"Exchange offers" by companies encourages the customers to buy new and
updated products.

Example: Nike persuades consumers to bring back their used shoes to the
store where they were purchased. These shoes are shipped back to Nike,
where they are shredded and made into basketball courts and running
tracks. Nike donates the material to make basketball courts, and donates
funds to help build and maintain those courts. Managing these reverse
flows is costly and complex. Some firms use their reverse logistics capabili­
ties for humane reasons, such as philanthropy.

Example: Leading e commerce like Amazon, Flipkart, and Snap deal used
to announce "Great Exchange Offer" where the customers can exchange
their old junk items for new products from their offers. Every year all the
leading e commerce run this campaign in the month of Feb and March and
give customer an opportunity to get good value of their old products in the
form of coupons which can be redeemed for the new products.. Handling
and disposing of used items poses a lot of challenge to the company but
this could be one of the strategies to boost sales.

Even though reverse logistics has strategic importance, the barriers to

good reverse logistics program is due to reasons : lesser importance of
reverse logistics relative to other issues, company policies, lack of systems,
competitive issues, management inattention, financial resources, person­
nel resources, and legal issues.

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The typical product/ components/parts flow in the case of an Air condi­

tioner is given below.

Steps for Effective Reverse Logistics Program:

1. Authorized personnel complete the appropriate forms and attach
them to the items being funneled to the recovery operation.
{Customer, service, and logistics processes must be defined and
communicated.)
2. Supply trucks can backhaul the older parts and materials to the
local supply location. {Schedules, transportation, networks must
be established and effectively managed.)
3. Dedicated staging locations at all supply locations as well as at
some customer locations specifically for materials bound for the
Reprocessing centers. {Customer processes and expectations
must be clearly defined and communicated.)

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4. .An intranet connection facilitates communications between the

processing centers, supply centers and customer locations.
5. A database of buyers categorized by certain classes of materials
should be maintained.
6. When the trucks arrive at the processing centers, sort the material,
categorize it according to buyer, then notify the appropriate
buyers that the material will be placed for bid.
7. Each lot of material is described and placed for auction on a
medium such as the company's web site. (Sales techniques and
mediums must be identified as well as processes, business rules,
and metrics.)
8. The winning bidder typically gets a specified time, e.g., an
additional five days to pay for and pick up the material. Buyers are
responsible for transport. (Expectations and business rules must
be developed and communicated.)
9. Track materials inbound and through the sorting, bid, sale and
release processes with a central accounting system. All cash
collected from sales should be sent by the buyer to a central
clearinghouse, which authorizes release of the material and
performs all the reporting, accounting and reconciliation activity.
(Central tracking system should be developed and analyzed.)
Overcoming the obstacles in Reverse Logistics:

• To have a clear 'Returns Management' policy.

• To develop strong reverse logistics strategies.
• To clearly outline financial, corporate, branding, marketing and
other objectives.
• To treat it as another business; it is not the returns department, it
is an operation.
• Have goals, objectives, and resources and let it be part of the
"Lifecycle" of the product.
• To design the reverse supply chain as part of the forward supply
chain.

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1.2 Logistics Vs Supply Chain

Both Logistics Management and Supply Chain Management are diverse
fields of study that are often felt like they may perhaps overlap. Logistics
Management deals with planning, implementing and controlling resource
ful, to and fro flow and storage of merchandise and services between the
point of manufacture and the point of utilization in order to congregate
customers' necessities. On the other hand, Supply Chain Management in­
corporates all the manufacturing operations, scheduling and inventory
control and resource management, location planning along with informa­
tion technology so as to coordinate purveyors, the company, and consum­
ers.Supply chain is the network of facilities (warehouses, factories,
terminals, ports,etc), vehicles (trucks, trains, planes and ocean vessels)
and the Information systems connecting the suppliers & customers.

Logistics is basically what happens in the supply chain and involves the
flow of material, information & money. Logistics activities (customer re­
sponse, inventory management, supply, transportation & warehousing)
connect and activate the objects in the supply chain. There is a difference
between the concept of supply chain management and the traditional
concept of logistics. Traditional logistics focuses its attention on activities
such as procurement, distribution, maintenance, and inventory
management. Supply chain management acknowledges all of
Traditional logistics and includes activities such as marketing, new prod­
uct development, finance, and customer service.
In the wider view of supply chain thinking, these additional
activities are now seen as part of the work needed to fulfill customer
requests. Supply chain management views the supply chain and the
organizations in it as a single entity. It brings a systems approach to
understanding and managing the different activities needed to
coordinate the flow of products and services to best serve the ultimate
customer. There are four stages in a supply chain: the supply network,
the internal supply chain (which are manufacturing plants), distribution
systems, and

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the end users. Moving up and down the stages are the three flows: mate­
ial or service flow, information flow and funds flow. Logistics is a term that
is frequently used to describe shipping and delivery service. The word "lo­
gistics" actually originated in the military, being used to define troop and
equipment movements within and across theaters of operation.

In the United States, the Council of Logistics Management defines Logis­

tics management as:
"The process of implementing and/or controlling the efficient and cost­
effective flow and storage of raw materials, in-process inventory, finished
goods, and related information from point-of-origin to point-of-consump­
tion for the purpose of conforming to customer requirements:'

During the Gulf War, U.S. Army Lt. Gen. William "Gus" Pagonis defined lo­
gistics as:

"The careful integration of transportation, supply, warehousing, mainte­

nance, procurement, contracting, and automation into a coherent func­
tional area in a way that prevents sub-optimization in any of these activ­
ities, and in a way that permits and enhances the accomplishment of a
given goal, objective, or mission:'

1.3 An Evolutionary View

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1.4 Drivers of Supply Chain Management

Each supply chain has its own unique set of market demands, customers
base and operating challenges and yet the drivers that influence Supply
chain efficiency remain essentially the same in every case. Companies in
any supply chain must make decisions individually and collectively re­
garding their actions at least in following six areas:

1. Demand Planning - What products does the market want? How

much of which products should be produced and by when? This
activity includes the creation of master production schedules that
take into account plant capacities, workload balancing, quality
control, and equipment maintenance.
2. Sourcing - functions a firm performs and functions that are
outsourced. This includes decision making between make or buy,
supplier selection, rating, monitoring etc.,
3. Inventory - What inventory should be stocked at each stage in
a supply chain? How much inventory should be held as raw
materials, semi finished, or finished goods? The primary purpose
of inventory is to act as a buffer against uncertainty in the supply
chain. However, holding inventory can be expensive, so what are
the optimal inventory levels and reorder points?
4. Facilities & Location - Where should facilities for production and
inventory storage be located? Where are the most cost efficient
locations for production and for storage of inventory? Should
existing facilities be used or new ones built? Once these decisions
are made they determine the possible paths available for product
to flow through for delivery to the final consumer.
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5. Transportation - How should inventory be moved from one supply

chain location to another? Air freight and truck delivery are
generally fast and reliable but they are expensive. Shipping by
sea or rail is much less expensive but usually involves longer
transit times and more uncertainty. This uncertainty must be
compensated for by stocking higher levels of inventory. When is
it better to use which mode of transportation?
6. Information - How much data should be collected and how much
information should be shared? Timely and accurate information
holds the promise of better coordination and better decision
making. With good information, people can make effective
decisions about what to produce and how much, about where to
locate inventory and how best to transport it.
The sum of these decisions will define the capabilities and effectiveness of
a company's supply chain. The things a company can do and the ways that
it can compete in its markets are all very much dependent on the effec­
tiveness of its supply chain. If a company's strategy is to serve a mass mar­
ket and compete on the basis of price, it had better have a supply chain that
is optimized for low cost. If a company's strategy is to serve a market
segment and compete on the basis of customer service and convenience,
it had better have a supply chain optimized for responsiveness.

1.5 Supply Chain for Competitive Advantage

The primary purpose of an efficient Supply chain is to fulfil customer de­
mand at the lowest possible cost.
The traditional understanding of logistics activity was that, logistics activ­
ity adds only 'cost 'to the product. A finished product is to be transported
to a customer, which adds transportation cost to the product, without
adding any 'value' to the product. With the evolution of the Supply chain
concept, there is a change in this traditional belief. Supply chain manage­
ment is not just about cost but it contributes to economic value addition.
An efficient supply chain strengthens top line as well as bottom line of an
organization.

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1.6 Supply Chains impacting top line and bottom line

Top-Line is where an organization reports the total revenues on their in­
come statement.
In contrast, bottom-line refers to Net Income (top line revenues minus ex­
penses). Bottom-line activities typically focus on cutting expenses in or­
der to improve inco

me.

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Logistics and supply chain management have an impact on revenue

growth because the improvement of service they can support can have
positive effects on sales and on customer retention.

The ability to deliver a product faster can make or break a sale. “If two al­
ternative [products] appear to be equal and one is immediately available
and the other will be available in a week, the customer evidently buys
the product, which is available immediately. FMCG products are good
candidates for this theory hence for similar products, the competition is
between their supply chains. An efficient supply chain ensures the avail­
ability of product, when the customer is looking for it. On time availability
increases the sales and revenue, which impacts top line.

Then, logistics and supply chain management have an impact on operat­

ing costs because many of them are a consequence of logistics and supply
chain management choices (e.g. transportation costs, warehousing costs
and so on).

With regard to fixed assets efficiency, the decisions made on number of

warehouses, Material Handling Equipment’s and vehicles often require
huge investments that affects bottom line.

By rationalizing the choices concerning these investments, logistics and

supply chain management are able to improve their efficiency, to reduce
the amount of capital required and to enhance the return on this capital.

Finally, logistic and supply chain management choices have a positive im­
pact on current assets efficiency because they are able to reduce the cash
to cash cycle time and the inventory level, in this way decreasing the re­
lated amount of invested capital.

1.7 Responsive and Efficient Supply Chains :

Responsiveness captures the firm's ability to handle the uncertainty of
market demand. Based on the nature of demand uncertainty, products
can be classified as functional products or innovative products.

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Functional products 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 e.g.: grocery.

Innovative products are those that try to satisfy a broad range of custom­
ers' wants with the features: high variety, unstable and very-hard-to pre­
dict demand, short life cycles, high profit margins and frequent stock-outs
and markdowns. Eg: fashion and technology products- high priced fashion
jewellery, bio-metric safety vaults etc.

Innovative products focus on capturing new markets and are designed to

be acceptable to changing customer demands.

An Efficient supply chain deals with functional products (grocery, news­

papers) that are often sold in high volumes and for which the demand can
be forecast. The organizations that produce such products focus on opera­
tions rather than product innovation. Because of the fair stability of their
product demand, such organizations can invest in large and financial-in­
tensive facilities, and improvement initiatives are focused on operations
rather than product innovation.

A Quick supply chain deals with innovative products (mobile phones,

white products) often with a high technical level and a demand that is dif­
ficult to forecast.

An Agile supply chain is similar to a quick supply chain in that it deals with­
innovative products for which the demand is difficult to forecast e.g. fash­
ion goods. Such products are in the introduction and growth stage of the
product life-cycle.

Market Responsive supply chains have similar characteristics to agile sup­

ply chains A Lean supply chain deals with functional products whose de­
mand can be accurately forecast and whose market share remains fairly
constant. These types of products (automobiles) are in the growth and
maturity stage of the product life-cycle. A lean Supply chain employs con­
tinuous improvement processes in order to eliminate waste or non-value
stops across the chain.

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A Leagile supply chain can be described as both lean and agile i.e. agile
enough to respond to what is actually selling (market driven) with avail­
ability as the market winner.

A Hybrid supply chain is similar to a leagile supply chain and deals with­
both functional and innovative products (automobiles, fork lifts) that are
in the introduction, growth and maturity phases of the product life-cycle.

Functional (predictable Innovative (Unpredictable

Aspects of demand
Demand) Demand)
Product Lifecycle More than 2 years 3 months to 1 year
Contribution margin (% of sales
5%to20% 20%to60%
price)
Low ( 10 to 20 variants per High ( often thousands of
Product variety
category) variants per category)
Likely forecast error 5%to20% 40%to 100%
Average stock-out rate 1%to2% 10%to40%
End-of-season mark markdown 0% 10%to 30%

Source : Supply Chain Management Text & cases By Janat Shah, "What is the Right Sup­ ply
Chain for Your Product?" Harvard Business Review-M.L.Fisher

1.8 Collaboration and Integration - Key to Supply Chain

Supply Chain Integration is defined as the extent to which all activities
within an organization, and the activities of its suppliers, customers, and
other supply chain members are integrated together.

There are two interrelated forms of integration along the supply chain: the
first type of integration involves co ordinating and integrating the forward
physical flow of deliveries between suppliers, manufacturers and custom­
ers. The other prevalent type of integration involves the backward co ordi­
nation of information technologies and the flow of data from customers to
manufacturers to suppliers.

Supply chain integration includes three stages from functional integration,

to internal integration, and then to external integration. Function­ al
integration establishes close relationships between functions such as

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shipping and inventory or purchasing and raw material management. This

stage is characterized by emphasis on the internal flow of the goods rather
than external customer satisfaction, and cost reduction rather than perfor­
mance improvement.

Internal integration involves the integration of all internal functions from

raw material management through production, shipping, and sales.

There is realization that there is little value in focusing on the flow of the
goods into the organization unless the flow is also well managed all the
way to the customers. This stage is characterized by full system visibility
from distribution to purchasing, and it requires different functions in an
organization to be coordinated and integrated to achieve customer val­
ue and satisfaction. External integration extends the scope of integration
outside the organization to embrace suppliers and customers.

External integration represents more than a change of scope. It also in­

cludes a change in attitude. The former adversarial relationships between
suppliers and customers change to one of mutual support and cooperation.

As supply chain members begin to work together, integration must oc­

cur between functions both internal to the organization {i.e., purchasing,
engineering, manufacturing, marketing, logistics, accounting, etc.) and ex­
ternal to the organization (i.e., end customers, retailers, distributors, ware­
houses, transportation providers, suppliers, agents, financial institutions,
etc.). Internal strategic integration requires that all company members
have access to an integrated information system, spanning multiple func­
tions and locations. This is often accomplished through a company-wide
ERP system, which links internal groups via a single integrated system.

External integration refers to the systems that link external suppliers and
customers to the focal company. External integration allows all supply
chain members to share critical information such as forecast demand, ac­
tual orders, Point of Sales data(POS) and inventory levels across the supply
chain.

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Systems used to integrate supply chain members include advanced plan­

ning systems, Internet linkages, network communications, and Electronic
Data Interchange (EDI).

ERP systems facilitate the integration of these processes by adopting a

single customer, product and supplier database. One master record with
multiple views is used for the enterprise. All processes use a common da­
tabase, through a powerful Relational Data base Management System.
(RDBMS).

Furthermore, information is captured only once, reducing the possibility

of inaccurate data entering the database. Information is provided to the
affected business process in real time, eliminating delays as a result of
information sharing. Specific transactions taking place in each business
process are visible to everyone in the organization; theoretically, if anyone
wants to find out where an order is in the process, or whether a supplier
has been paid, etc., he or she can do so. Furthermore, all business process­
es are linked with the workflow, such that standard workflow templates
for entering information about transactions are provided every step of the
way.

COLLABORATION:
As companies migrate toward more extended supply chains, collabo­
ration is becoming their most strategic activity. The means by which
companies within the supply chain work together toward mutual objec­
tives through the sharing of ideas, information, knowledge, risks, and
rewards.

Drivers of collaboration include the desire to access:

Technology owned by another company.

A technology that is too capital-intensive for the company to
invest in alone.
A competency that is too costly to acquire, develop, or maintain.
A new market effectively closed off by high entry cost or
preconditions (trade barriers, legislation).

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Potential collaboration partners are customers, material suppliers and

suppliers of services that support supply chain operations.

Different levels of collaboration among the Supply Chain partners are pos­
sible.

Transactional collaboration (efficient execution of transactions among

partners).

Cooperative collaboration (requires a higher degree of information sharing

such as demand plans,