Introduction to Supply Chain

Meaning:
Supply Chain Management (SCM) refers to the systematic coordination of all key
activities involved in the flow of goods, services, information, and finances—from the initial
supplier to the final customer. It aims to improve efficiency, reduce costs, and ensure the
timely delivery of products or services by managing the interconnected network of suppliers,
manufacturers, warehouses, transportation providers, and retailers.

Definition:
According to the Council of Supply Chain Management Professionals (CSCMP):
“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.”

Evolution of Supply Chain:

1. 1960s – Fragmentation
In this early stage, all supply chain activities were handled separately and independently
within different departments of an organization. There was no coordination among functions,
which led to inefficiencies such as excess inventory, poor forecasting, and slow response to
market demands.
Key Characteristics:
1. Departments like procurement, production, warehousing, and transportation worked
in silos.
2. Lack of data sharing between functions.
3. Redundant processes and poor communication.
4. Focus was mostly on individual task efficiency rather than the overall system.
5. Functions involved:
 Demand Forecasting
 Sourcing / Purchasing
 Production and Requirement Planning
 Inventory Management
 Warehousing, Transportation
 Customer Service, etc.
2. 1980s – Consolidation
 To address inefficiencies, companies began grouping related activities under two major
categories:
1. Materials Management (Inbound activities like procurement, inventory, warehousing)
2. Physical Distribution (Outbound activities like order processing, delivery)

Key Improvements:
1. Functional alignment and coordination.
2. Reduction in delays and excess inventory.
3. Beginning of process integration, but still mostly internal to the company.
4. Still limited in scope – suppliers and customers were not fully integrated.

3. 1990s – Integration
This era saw the emergence of Logistics as a comprehensive function that brought both
materials management and physical distribution under one umbrella.
What changed:
1. Logistics became a strategic function.
2. Emphasis on end-to-end flow of materials, information, and finances.
3. Rise of integrated software systems like ERP (Enterprise Resource Planning).
4. Coordination with suppliers and customers began to take shape.

Focus:
 Efficiency in total logistics cost.
 Better customer service and delivery performance.

4. 2000s – Value Capture

By the 2000s, Supply Chain Management (SCM) emerged as a strategic business
function that went beyond logistics.

SCM included:
1. Collaboration across departments (IT, Marketing, Sales, Finance, Strategic Planning).
2. Partnership with suppliers and customers to create shared value.
3. Supply chain as a source of competitive advantage rather than just a cost center.
Key Features:
 1. Integration of planning, sourcing, production, delivery, and returns.
2. Focus on lean supply chains, agility, and responsiveness.
3. Strategic alignment with business goals.

5. 2010s – Automation & Digitalization

In this modern phase, SCM embraced technology and digital tools to enable faster,
smarter, and more automated decisions.

Technologies driving this phase:

 Artificial Intelligence (AI)
 Internet of Things (IoT)
 Big Data Analytics
 Blockchain
 Robotic Process Automation (RPA)

Key Outcomes:
1. Real-time visibility into supply chain operations.
2. Predictive and prescriptive analytics for better decision-making.
3. Seamless coordination across global supply chains.
4. Enhanced customer experience and agility

Objectives of Supply Chain Management

1. Cost Reduction:
SCM focuses on minimizing costs across all stages—sourcing raw materials,
manufacturing, warehousing, distribution, and delivery. This involves negotiating better
prices, optimizing routes, reducing energy usage, and avoiding unnecessary expenses.

2. Enhanced Customer Service:

Customer satisfaction depends on receiving the right product, at the right place, at the
right time. SCM aims to meet customer expectations through timely deliveries, accurate order
fulfillment, and responsive service.

3. Effective Inventory Management:

 This involves maintaining optimal inventory levels—not too much (which increases
holding costs) and not too little (which causes stockouts). Techniques like Just-In-Time (JIT)
and safety stock management are used.

4. Enhanced Supplier Relationships:

Long-term, trust-based relationships with suppliers improve reliability, reduce lead
times, and enable better coordination. Collaborative planning and transparent communication
strengthen partnerships.

5. Risk Management:
Supply chains are vulnerable to disruptions like natural disasters, political instability,
cyber-attacks, or supplier failures. SCM involves identifying such risks and developing
contingency plans.

6. Forecasting:
Accurate demand forecasting helps in planning production, procurement, and
inventory. It prevents both overproduction and underproduction, aligning supply with actual
demand.

7. Continuous Improvement:
SCM is not static. It requires regular performance evaluation and process
enhancements using tools like KPIs, feedback systems, and lean methodologies to adapt to
changing conditions.

Importance of Supply Chain Management

1. Reduces Overall Costs:

Supply Chain Management helps businesses cut unnecessary expenses at every stage
— purchasing, production, storage, and delivery. By using better planning, technology, and
supplier coordination, companies can reduce labor costs, transportation costs, and waste.

2. Increases Customer Loyalty:

 When a business delivers the right product, at the right time, in perfect condition,
customers are more likely to return. A reliable supply chain builds trust, which leads to repeat
purchases and long-term loyalty.

3. Supports Business Growth

As demand grows, a well-managed supply chain can scale up operations quickly. It
helps businesses handle more orders, enter new markets, and serve more customers without
delays or breakdowns.

4. Improves Product Quality

SCM ensures that every product meets quality standards by monitoring raw materials,
supplier performance, and production processes. This reduces defects and increases customer
satisfaction.

5. Enhances Competitiveness
A smart and fast supply chain gives companies an edge over competitors. Businesses
that can deliver faster, cheaper, and better-quality products gain more market share.

6. Ensures Business Continuity

SCM includes planning for disruptions like strikes, natural disasters, or supply
shortages. With backup suppliers and contingency plans, companies can keep running
smoothly even during crises.

7. Boosts Profitability
A strong supply chain reduces costs and increases sales by meeting demand efficiently
and keeping customers happy. This results in higher profits and better financial performance.

Decision Phases:
Decision phases can be defined as the different stages involved in supply chain
management for taking an action or decision related to some product or services. Successful
supply chain management requires decisions on the flow of information, product, and funds
that fall into three decision phases.
Here we will be discussing the three main decision phases involved in the entire process of
supply chain. The three phases are described below –

1. Supply Chain Strategy:

 In this phase, decision is taken by the management mostly. The decision to be made
considers the sections like long term prediction and involves price of goods that are
very expensive if it goes wrong. It is very important to study the market conditions at
this stage.
 These decisions consider the prevailing and future conditions of the market. They
comprise the structural layout of supply chain. After the layout is prepared, the tasks
and duties of each is laid out.
 All the strategic decisions are taken by the higher authority or the senior management.
These decisions include deciding manufacturing the material, factory location, which
should be easy for transporters to load material and to dispatch at their mentioned
location, location of warehouses for storage of completed product or goods and many
more.

2. Supply Chain Planning:

 Supply chain planning should be done according to the demand and supply view. In
order to understand customers demands, a market research should be done. The
second thing to consider is awareness and updated information about the competitors
and strategies used by them to satisfy their customer demands and requirements. As
we know, different markets have different demands and should be dealt with a
different approach.
 This phase includes it all, starting from predicting the market demand to which market
will be provided the finished goods to which plant is planned in this stage. All the
participants or employees involved with the company should make efforts to make the
entire process as flexible as they can. A supply chain design phase is considered
successful if it performs well in short-term planning.

3. Supply Chain Operations:

The third and last decision phase consists of the various functional decisions that are
to be made instantly within minutes, hours or days. The objective behind this decisional
phase is minimizing uncertainty and performance optimization. Starting from handling the
customer order to supplying the customer with that product, everything is included in this
phase.
For example:
Imagine a customer demanding an item manufactured by your company. Initially, the
marketing department is responsible for taking the order and forwarding it to production
department and inventory department. The production department then responds to the
customer demand by sending the demanded item to the warehouse through a proper medium
and the distributor sends it to the customer within a time frame. All the departments engaged
in this process need to work with an aim of improving the performance and minimizing
uncertainty.

Competitive and Supply Chain strategies

1. Supply Chain Strategy:
• Material Procurement
• Transportation of Material
• Manufacture of Product or Creation of service
• Distribution of Product

2. Competitive Strategy:
Defines the set of customer needs a firm seeks to satisfy through its product or
services.
• Product Development Strategy: Specifies the portfolio of new products that the company
will try to develop.
• Marketing and Sales Strategy: Specifies how the market will be segmented and product
positioned, Priced and Promoted.

Achieving strategic fit

For a company to achieve strategic fit, it must accomplish the followin:
• The competitive strategy and all functional strategies must fit together to form a
coordinated overall strategy. ...
• The different functions in a company must appropriately structure their processes and
resources to be able to execute these strategies successfully.
• The design of the overall supply chain and the role of each stage must be aligned to support
the supply chain strategy.
 Expanding Strategic Scope:
Expanding the scope of strategic fit improves supply chain performance.
For example:
IKEA has achieved great success by expanding its scope of strategic fit to include all
functions and stages within the supply chain. Its competitive strategy is to offer a reasonable
variety of furniture and home furnishings at low prices. Its stores are large and carry all
products in inventory. Its products are designed to be modular and easy to assemble. The
large stores and modular design allow IKEA to move final assembly and last-mile delivery
(two high- cost operations) to the customer. As a result, all functions within the IKEA supply
chain focus on efficiency.
Its suppliers concentrate on producing large volumes of a few modules at low cost. Its
transportation function focuses on shipping large quantities of high-density unassembled
modules at low cost to the large stores. The strategy at every stage and function of the IKEA
supply chain is aligned to increase the supply chain surplus.

1. Interoperation Scope: Minimizing Local Cost

The interoperation scope has each stage of the supply chain devising its strategy
independently. In such a setting, the resulting collection of strategies typically does not
align, resulting in conflict. This limited scope was the dominant practice during the 1950s
and 1960s, when each operation within each stage of the supply chain attempted to
minimize its own costs. As a result of this narrow scope, the transportation function at
many firms may have shipped full truckloads without any regard for the resulting impact
on inventories or responsiveness, or the sales function may have offered trade promotions
to enhance revenue without any consideration for how those promotions affected
production, warehousing, and transportation costs. The resulting lack of alignment
diminished the supply chain surplus.

2. Intrafunctional Scope: Minimizing Functional Cost

Over time, managers recognized the weakness of the interoperation scope and
attempted to align all operations within a function. For example, the use of air freight
could be justified only if the resulting savings in inventories and improved responsiveness
justified the increased transportation cost. With the intrafunctional view, firms attempted
to align all operations within a function. All supply chain functions, including sourcing,
manufacturing, warehousing, and transportation, had to align their strategies to minimize
total functional cost. As a result, product could be sourced from a higher-cost local
supplier because the resulting decrease in inventory and transportation costs more than
compensated for the higher unit cost.
3. Interfunctional Scope: Maximizing Company Profit

The key weakness of the intrafunctional view is that different functions within a firm
may have conflicting objectives. Over time, companies became aware of this weakness as
they saw, for example, marketing and sales focusing on revenue generation, and
manufacturing and distribution focusing on cost reduction. Actions the two functions took
were often in conflict, hurting the firm’s overall performance. Companies realized the
importance of expanding the scope of strategic fit and aligning strategy across all
functions within the firm. With the interfunctional scope, the goal is to maximize
company profit. To achieve this goal, all functional strategies are developed to align with
one another and with the competitive strategy.
The goal of aligning strategies across functions results in warehouse operations
within McMaster-Carr carrying high inventory and excess capacity to ensure that
marketing’s promise of next-day delivery is always met. The company’s profits grow
because the increased margin that customers are willing to pay for high reliability more
than compensates for the higher inventory and warehouse expense. The company enjoys
high profits because all functions align their strategy around the common objective of
customer convenience in the form of next-day delivery of a wide variety of MRO
products.

4. Intercompany Scope: Maximizing Supply Chain Surplus

The goal of only maximizing .mpany profits can sometimes lead to conflict between
stages of a supply chain. For example, both the supplier and the manufacturer in a supply
chain may prefer to have the other side hold most of the inventory, with the goal of
improving their own profits. If the two parties cannot look beyond their own profits, the
more powerful party will simply force the other to hold inventories without any regard for
where inventories are best held. The result is a decrease in the supply chain surplus— the
total pie that both parties get to share.
The intercompany scope proposes a different approach. Instead of just forcing the
inventory onto the weaker party, the two parties work together to reduce the amount of
inventory required. By working together and sharing information, they can reduce
inventories and total cost, thus increasing the supply chain surplus. The higher the supply
chain surplus, the more competitive the supply chain is.
A good example of the intercompany approach is how WalMart and P&G plan
promotions jointly. The two companies have a team (with employees from both parties)
that works to ensure that the promotion is timed and executed to benefit both sides.
Before the initiation of this collaborative effort, promotions at Walmart sometimes
required P&G to run its facilities with overtime at high cost. The result was a decrease in
the supply chain surplus because the product was sold at a discount at a time when it was
being produced at high marginal cost. The collaborative teams now try to increase the
supply chain surplus by timing the promotion to have high sales impact while minimizing
 the marginal cost increase. They work to ensure that the product is produced in such a
manner that all promotion demand is met without generating excess unsold inventories.

5. Agile intercompany Scope:

Up to this point, we have discussed strategic fit in a static context; that is, the players
in a supply chain and the customers’ needs do not change over time. In reality, the
situation is much more dynamic. Product life cycles are getting shorter, and companies
must satisfy the changing needs of individual customers. A company may have to partner
with many firms, depending on the product being produced and the customer being
served. Firms’ strategies and operations must be agile enough to maintain strategic fit in a
changing environment.
Agile intercompany scope refers to a firm’s ability to achieve strategic fit when
partnering with supply chain stages that change over time. Firms must think in terms of
supply chains consisting of many players at each stage. For example, a manufacturer may
interface with a different set of suppliers and distributors depending on the product being
produced and the customer being served. Furthermore, as customers’ needs vary over
time, firms must have the ability to become part of new supply chains while ensuring
strategic fit. This level of agility becomes more important as the competitive environment
becomes more dynamic.

Drivers of Supply Chain:

Supply Chain Drivers are the key factors or components that determine how well a
supply chain performs in terms of efficiency, responsiveness, cost, and customer satisfaction.
There are six main drivers of supply chain management, grouped into two categories:

1. Logistical Drivers (Physical movement of goods)

These deal with how products are stored, moved, and produced.

a. Facilities
 Meaning: Locations where products are made, stored, or distributed.
 Examples:
o Factories (where goods are made)

o Warehouses (where goods are stored)

o Distribution centers (where goods are sorted and shipped

 Role:
o More facilities = faster delivery, higher cost.

o Fewer facilities = lower cost, slower delivery

b. Inventory
 Meaning: The raw materials, work-in-progress, and finished goods that a company
holds.
 Examples:
o Stock in a warehouse

o Goods on store shelves

 Role:
o More inventory = product availability improves, but holding cost increases.

o Less inventory = saves cost, but risk of stockouts.

c. Transportation
 Meaning: Movement of goods from one place to another.
 Examples:
o Trucks, ships, trains, airplanes

 Role:
o Fast transport (air) = higher cost, quicker service.

o Slow transport (sea) = lower cost, slower delivery.

2. Cross-Functional Drivers (Information & decision-related)

These support the logistical drivers by improving coordination and efficiency.

a. Information
 Meaning: Data about products, inventory, orders, delivery times, and customer
demand.
 Examples:
o Online tracking

o Sales data reports

o ERP systems

 Role:
o Accurate information = better decision-making, reduced cost.
 o Poor information = delays, errors, higher cost.

b. Sourcing
 Meaning: Choosing suppliers and deciding whether to make or buy a product.
 Examples:
o Outsourcing production to China

o Buying parts from third-party suppliers

 Role:
o Choosing the right suppliers = reduces cost, improves quality and speed.

c. Pricing
 Meaning: Deciding how much to charge customers and how to set discounts.
 Examples:
o Seasonal discounts

o Bulk purchase deals

 Role:
o Smart pricing = balances demand and supply, improves profits.

Obstacle to Achieve strategic fit