SUPPLY CHAIN MANAGEMENT

Renjith.R, II MIB, PG Department of International Business,

Sree Narayana Guru College, KG Chavadi, Coimbatore 641 105
Email.: renju765@gmail.com Mobile No.: + 91 97442 24054

Dr.M.Saravanan, Assistant Professor, PG Department of International Business

Sree Narayana Guru College, KG Chavadi, Coimbatore 641 105
Email.: shravan.murugan@gmail.com Mobile No.: + 91 99434 37749

Supply Chain Management (SCM) can be viewed as the means for supply chains to achieve their
objectives. In other words SCM is a framework that includes a set of techniques and methods to
management and control the flows of material, information and financials in the supply chains to
deliver value to all parties starting from the most upstream supplier all the way down to the most
downstream end-customer. The task of SCM is to design, plan, and execute the activities at the
different stages so as to provide the desired levels of service to supply chain customers
profitably.

ORIGIN OF SUPPLY CHAIN MANAGEMENT

Over the past century companies transformed from vertically integrated enterprises to global,
focused operations to minimize their cost, make the best use of their competencies and to
improve quality. This shift created multiple independent organizations still needing to be
virtually integrated and coordinated for satisfying the ultimate end customers demand. Each of
these organizations have been exhausting numerous approaches to optimize operations within
their walls but at a certain point, there is not much one can do but consider the bigger picture and
optimize the extended enterprise which ultimately is viewed as a single company by the end-
customer. Therefore, SCM can be viewed as the next natural step in the evolution of business
management.
SCM utilizes techniques and methods which fall into operations management (OM) and
management science which is also known as operations research (OR).
Therefore all the developments in OM/OR lay the foundation for an effective and intelligent
SCM.
Although one might claim as for many things that the supply chains and SCM existed since the
existence of mankind, we are going to focus here to some more systematic development that
happened in the areas of OR/OM since the industrial revolution in the 19th century.

IMPORTANCE OF SUPPLY CHAIN MANAGEMENT

SCM is important, because many inefficiencies exit (Figure 5) in todays supply chains including
supply shortages in the upstream for the demanded materials whereas high inventories for un-
demanded or obsolete products in the overall chain consequently, high stock-outs, low fill rates
and high landed cost for the overall supply chain. It is intuitive that eliminating these
inefficiencies should save companies millions of dollars, but how much? It is not easy to answer
this question in a generic sense but here are some facts which can help us to guess the magnitude
of savings:
 According to the State of Logistics Report (Wilson and Delaney, 2000), in 2000, the US
companies spent $1 trillion (10 of GNP) on supply-related activities (movement, storage, and
control of products across supply chains).
Another study argues that companies that improve their supply chain can generate savings
equal to 7% of their annual revenues (IEE Solutions, 1997).

Similarly, $30 billion potential savings in grocery industry has been estimated (Kurt Salmon
Associates, 1993).
Besides these study reports, there are numerious real life examples from major corporations
(such as Walmart, Dell Amazon to name a few) which should convince us that intelligent
SCM is indeed vital for competitiveness.
Dell Computer has outperformed the competition in terms of shareholder value growth over
the eight years period, 1988 1996, by over 3.000% (see Anderson and Lee, 1999) using
Direct business model and Build-to-order strategy.
Compaq Computer estimated that it lost $500 million to $1 billion in sales in 1994 because
its laptops and desktops were not available when and where customers were ready to buy
then (Henkoff, 1994)
Wal-Mart became the words largest retailer with 5% of US retail spending by applying
innovative SCM techniques such as cross-docking and year around low pricing (Kuaffaman,
2000)

KEY HIERARCHICAL DECISION PHASES OF SCM

Design Planning Execution

Typically, instead of tackling the whole SCM problem at once, one would divide the decisions
process into phases based on the strategic, tactical versus operational behavior of the supply
chain decision. In supply chains the strategic decisions typically concern supply chain design,
whereas tactical decisions can be treated under planning and operations decisions can be grouped
under execution for the fulfillment of a customer request. Therefore Design. Planning and
Execution can be viewed as the hierarchical decision phases of a supply chain.

In the design phase one needs to decide on the product portfolio, when to transition in and out
the products, make/buy decision, selections, selection of partners, contract negotiation and
management, location, number and capacity of facilities, modes of transportation, supply chain
organizational structure, building strategic alliances with third party logistics companies and
collaboration with major suppliers and customers to come up with superior designs. These
decisions tend to be more strategic and apply for longer terms typically in the order of years.
The frequency of the strategic decisions would typically be annually.

The second decision phase is planning, which utilizes the boundaries and decisions set by the
design phase. For example some directives communicated from the design phase for demand
planning purposes could be which geographies and products to focus on and similarly for master
planning which facilities to use and what capacities to consider and in which warehouses to store
inventory.

Planning includes demand forecasting and planning, master planning (also known as aggregate
planning) that includes production, distribution, capacity, inventory and replenishment plans,
spare parts planning, allocation planning dealing with the allocation of available supply and
products to different customer channels as well as demand collaboration with customers to
improve demand forecasts and supply collaboration with suppliers to ensure reliable supply
delivery. Allocation strategies based on smart pricing and the nature of demand. The time
horizon for planning decisions change typically be weekly to monthly.

The final decision phase which is sometimes referred as the demand fulfillment process is
typically concerned with the short term execution (typically time horizon of days to weeks) of
the supply chain based on forecasted/planned production and day to day customer requests. This
phase involves purchasing of raw materials and supplies scheduling of factories to make the
products, deploying logistics carriers to move the product, warehousing to store and fulfilling the
request through order management process and providing customer support services after sales
completion.
Last but not least managing returns is a major component of execution referred as reverse
logistics.

EXAMPLE: - BICYCLE MANUFACTURING COMPANY

Consider the following bicycle manufacturing company

Large corporation, manufacturing and delivering bikes in all parts of USA.
For operational purpose the market regions are established as West, Central, and East USA.
Forecasts the demand and manufactures to meet the forecasts.
Procures raw materials from different suppliers and manufactures bikes in one central facility in
USA.
Bikes are shipped to regional warehouses in USA.
All bikes are of a fixed configuration.

Typical flow for this company is as follows:

Step1
Market regions forecast their regional sales.
Head office collects all the sales figures and aggregates the forecasts based on
consensus/historical estimates.
Steps 2
Head Office then adjusts the forecast.
Step 3
Forecasts are planned for generating long-term material and capacity requirements at the
manufacturing facility.
Factory is instructed on what to build, when to build and how much to build based on the
forecast.
Factory communicates build position to the head office.
Step 4
The head office allocates the available and projected supply to the sales representatives
Step 5
Orders are taken through the order entry system at different levels
Step 6
The sales representatives quote order for due date based on the supply allocated to them
Step 7
The factory assembles bikes based on the forecast (pick, and pack)
Step 8
The factory ships assembled bikes via third party logistics career (3 PL).
Step 9
Allocations are stored for forecasting in the next cycle.

CHALLENGES TO EFFECTIVES SUPPLY CHAIN MANAGEMENT

There are two major challenges 1) difficulty in attaining supply chain wide synchronization and
optimization and 2) managing uncertainty inherent within supply chains.

GLOBAL OPTIMIZING

It is challenging to design and operate a supply chain so that total system wide costs are
minimized and system wide services levels are maintained. This is mainly because

The supply chain is a complex network with a number suppliers, manufactures,

distributors, retailers and customers in different geographies.

Different players in the supply chain frequently have different and conflicting
objectives. Suppliers want manufactures commit to large and stable volumes with flexible
delivery dates. On the other hand, flexibility to meet changing customer needs and demand.
Warehouses and distribution would aim for low inventory and reduce transportation cost by
reduced frequency but high volumes. Finally, customers want high variety, high quality,
latest technology, quick response and delivery lead times

The supply chain is a dynamic system that evolves over time. Some of things which
continuously change are the power, competition and the relations with supply chain partners.
Supply chain strategies will need to also take into account seasonal variations in demand,
cost other market trends.