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Supply Chain Management

 Process of Supply Chain management:

Supply chain management is defined as the design, planning, execution,

control, and monitoring of supply chain activities with the objective of creating
net value, building a competitive infrastructure, leveraging worldwide logistics,
synchronizing supply with demand and measuring performance globally.

SCM draws heavily from the areas of operations management, logistics,

procurement, and
information technology, and strives for an integrated approach.

Supply Chain Management Process:

The building blocks of Supply Chain Management are Strategic Planning,

Demand Planning, Supply Planning, Procurement, Manufacturing,
Warehousing, Order Fulfillment and Transportation business processes.

1. Strategic Planning Process

Strategic Planning Process involves the strategic supply chain design and
strategic sourcing.

Strategic Supply Chain Design Process: Strategic Supply Chain Design is the
design, evaluation, and optimization of the supply chain model used in the
planning applications. Every part of the supply chain such as locations,
transportation lanes, resources and products are modeled to execute planning
based on this network. This helps to respond immediately and accurately to
the new developments by tracking alert situations in the supply network.

Strategic Sourcing Process: Strategic Sourcing Process helps to identify a

minimized set of core suppliers with whom to establish strategic relationships,
and also de􀃕ne the parameters that drive procurement execution. Vendor
analysis and purchasing statistics are used to evaluate potential suppliers.
Performance management through spend and contract

2. Demand Planning Process

Demand Planning process involves Forecasting, Lifecycle Planning ,
Promotion Planning and Consensus Demand Planning.

Forecasting Process: Forecasting predicts future demand based on historical

and judgmental data. Forecasts can be created in using different methods
such as statistical methods, causal analysis, human judgment or combination
of all the above. Forecast accuracy can be improved using statistics and the
overall performance management can be analyzed through forecast accuracy
analytics. Different statistical forecasting methods are available such as
exponential smoothing, holt,winters, croston, moving average, linear
regression, and seasonal linear regression

Lifecycle Planning Process : Life cycle planning involves planning the product
life cycle. Lifecycle Planning simulates based on the forecasting data the
launch, growth, maturity and discontinuation phases of different products.
compliance analytics are also done for enabling the strategic sourcing

Promotion Planning Process: Promotion Planning Process enables to plan

promotions or other special events separately from the rest of your forecast.
Promotion effect is calculated using causal techniques to measure past
promotional impact and projected into designated
periods in the future. Promotion planning can be used to plan one o􀃕 events
such as the millennium, repeated events such as quarterly advertising
campaigns, trade fairs, contests etc.

Consensus Demand Planning Process : Consensus Demand Planning

Process creates a consensus demand plan by integrating all available
information. This is a result of combining various data such as Forecast,
Promotions Budgets, Sales plans etc.

3. Supply Planning Process

Supply Planning process involves Safety Stock Planning, Supply Network

Outsourcing, Distribution Planning, Customer Collaboration and Supplier
Safety Stock Planning Process: Safety Stock Planning Process arrive the
appropriate level of safety stock inventory for all intermediate and finished
products at their respective locations to meet a target service level.
Supply Network Planning Process: Supply Network Planning process
calculates quantities to be delivered to the locations to match customer
demand and maintain desired service level.

Outsourcing Process: Outsourcing process enables outsourcing of

manufacturing facilities to a third party, known as the subcontractor.

Distribution Planning: Distribution Planning process determine the best short

term strategy to allocate available supply to meet demand and to replenish
stocking locations.

Customer Collaboration Process: Customer Collaboration process allows

vendor to assume responsibility for planning the levels of inventory at the
customer location.

Supplier Collaboration Process: Supplier Collaboration Process enables

supplier to receive demand and stock information and performs replenishment
planning tasks for manufacturer

4. Procurement Process

Procurement process involves Purchase Order Processing, Receipt

Conformation and Invoice Verification.

Purchase Order Processing : Purchase Order Processing fulfills the direct

procurement requirements through the sourcing, issuance, and conformation
of purchase orders.

Receipt Conformation processing: Receipt Conformation processing informs

other departments about the received and conformed quantity of ordered

Invoice Verification process: Invoice Verification process receives, enters and

checks vendor’s invoice for correctness.
5. Manufacturing Process

Manufacturing Process involves Production Planning / Detailed Scheduling,
Manufacturing Execution.

Production Planning / Detailed Scheduling process: Production Planning /

Detailed Scheduling process supports the process of assigning production
orders to resources in a specific sequence and time frame.

Manufacturing Execution: Manufacturing Execution process supports the

process of capturing actual production information from the shop floor to
support production control and costing processes.

6. Warehousing Process:

Warehousing Process involves Inbound Processing, Outbound Processing,

Cross Docking, Warehousing, Storage and Physical Inventory.

Inbound Processing: Inbound Processing comprises all the steps of an

external procurement process that occur when the goods are received.

Outbound Processing: Outbound Processing prepares and ships goods to

their destination

Cross Docking: Cross Docking Processes merchandise in a distribution center

or warehouse where the goods are brought from the goods receipt directly to
goods issue without being stored.

Warehousing & Storage : Warehousing & Storage Processes warehouse

internal movements and storage of materials.

Physical Inventory: Physical Inventory supports all activities for planning and
executing the physical inventory

7. Order Fulfillment Process

Order Fulfillment Process involves the sales order processing and billing
business process.
Sales Order Processing: Sales Order processing allows the order entry,
pricing, and scheduling order for fulfillment.
Billing Process: Billing process considers all activities from issuing the invoice
to the incoming payment.
8. Transportation Process
Transportation Process involves the transportation planning, transportation
execution and freight costing processes.

Transportation Planning Process: Transportation Planning process creates an

optimized, executable transportation plan for the enterprise.

Transportation Execution Process: Transportation Execution process covers

the complete and integrated solution process to create, execute, and monitor

Freight Costing Process: Freight Costing process calculates and settles the
freight costs.


 Key Features of Supply Chain Management:

Supply chain softwares are robust, feature-rich technology softwares that

enhance operations from end-to-end.

Today’s popular supply chain softwares can help companies achieve and
maintain a competitive edge by empowering them to streamline and enhance
their most important supply chain operations from start to finish. With supply
chain software in place, organizations can maximize cost-efficiency, increase
productivity, and give their bottom line a big boost.

This functionality is designed to fully automate and support supply chain

processes from end-to-end, and includes:

Inventory Management
With a supply chain package, companies can significantly improve the way
they track and manage their supplies of raw materials and components
needed for production, finished goods to satisfy open sales orders, and spare
parts required for field service and support. This eliminates excess and waste,
frees up valuable real estate for other important purposes, and minimizes
related storage costs.

Order Management
Supply chain software can dramatically accelerate the execution of the
entire order-to-delivery cycle by helping companies to more productively
generate and track sales orders. Supply chain also enables the dynamic
scheduling of supplier deliveries to more effectively meet demand, and more
rapid creation of pricing and product configurations.

All activities and tasks associated with sourcing, purchasing, and payables
can be fully automated and streamlined across a company’s entire supplier
network with a supply chain software package. As a result, businesses can
build stronger relationships with vendors, better assess and manage their
performance, and improve negotiations to leverage volume or bulk discounts
and other cost-cutting measures.

As companies expand globally, their supply chains become more and more
complex. This makes the coordination of the numerous warehouses and
transportation channels involved quite a challenging endeavor without supply
chain software in place. With supply chain, businesses can improve on-time
delivery performance and boost customer satisfaction by achieving complete
visibility into how finished goods are stored and distributed, regardless of the
number of facilities or partners that participate.

Forecasting and Planning

With supply chain software, organizations can more accurately anticipate
customer demand, and plan their procurement and production processes
accordingly. As a result, they can avoid unnecessary purchases of raw-
materials, eliminate manufacturing over-runs, and prevent the need to store
excess finished goods, or slash prices to move products off of warehouse

Return Management
Supply chain software can simplify and accelerate the inspection and handling
of defective or broken goods - on both the buy and sell side of the business -
and automate the processing of claims with suppliers and distributors, as well
as insurance companies.

Many supply chain offerings also include add-on options or modules designed
to enhance related activities. Through these features, support is provided for a
variety of important processes such as contract management, product
lifecycle management, capital asset management ,and more.

Advantages of SCM
Supply chain software provides numerous advantages to organizations,
empowering them to improve operations from end-to-end.

Key Benefits of Supply Chain Management Software:

 Improve Your Supply Chain Network

 Minimized Delays
 Enhanced Collaboration
 Reduced Costs.

Disadvantages of SCM
The biggest disadvantage of global supply chain management is the heavy
investment of time, money, and resources needed to implement and overlook
the supply chain.


Drivers and obstacles

Let us now learn more about drivers and obstacles in supply chain

Facilities, inventory, transportation and information are the four major drivers
of the supply chain. The performance of any supply chain can be measured
on the basis of the drivers that run it.

Role played by major drivers in achieving a strategic fit

We know that in order to achieve a strategic fit, a company needs to balance

its efficiency with responsiveness in its supply chain so as to suit its
competitive strategy. Thus, in order to keep a check on this balance, a
company needs to analyse the performance of the drivers of its supply chain
i.e. the facilities, inventory, transportation and information, as this would also
help the company to know how and when it has achieved the strategic fit.

Major drivers of any supply chain

 Facilities (for example, Production unit)

 Inventories (for example, Stock of goods)
 Transportation (for example. Modes and Routes)
 Information (for example, Customer demand

Decision making in a Supply Chain

In order to take a decision in a supply chain, we need to have a framework

within which the supply chain needs to exercise itself in order to achieve a
strategic fit. This framework can be called ‘the supply chain decision making

The above supply chain decision making framework depicts a framework for
structuring the drivers. From the first unit onwards it has been our endeavour
to ieam how a company needs to act in order to achieve a strategic fit along
with its competitive strategy. Later, we learnt that this can be achieved by
keeping a balance between two major essentials which are responsiveness
and efficiency. To achieve this goal the company utilises the above four major
drivers. After exercising these drivers with respect to responsiveness and
efficiency, the combined effect of these drivers together help in determining
the supply chain responsiveness and efficiency.

Moreover, we are going to study in detail the different decisions that a supply
chain manager needs to take with respect to each driver. Thus we shall stress

 Role played by a driver in the supply chain: Facilities can be defined as

the location to or from which inventory transported .It is within a facility
that the inventory is either transformed into another state or
manufactured. Also, it is the location where goods are stored
(warehousing) before being shipped to the next stage.
 Role played by a driver in competitive strategy: The facilities should be
flexible. It is this flexibility in terms of its capacity to perform functions
that is the key driver of supply chain performance in terms of
responsiveness and efficiency. For example, if a company increases its
capacity of production, and produces a greater quantity in a single
location, then it can achieve economies of scale and thereby increase its
efficiency both in terms of quantity produces and costs. However, it is
known that responsiveness comes at a cost.
 Components of decision making: The components of facilities decisions
are nothing but factors that must be analysed by a company before
coming up with a facility. The following factors should be kept in mind
and analysed by a company before coming up with a facility,

1. Location
2. Capacity
3. Operations methodology
4. Warehousing methodology

Inventory Management

We are going to study the role that inventory plays in supply chain and how
the managers use inventory to drive the supply chain. Existence of inventory
is because of the mismatch between the supply and demand. Such a
mismatch exists in industries where it is economical for them to produce in lots
or where companies need to stock goods in anticipation of future demand.
Inventory is important because it can readily satisfy the demand of the
customers by having the product ready.

Role played by inventories in the competitive strategy

The inventory plays a significant role in a supply chain’s ability to perform well.
It helps a company to be responsive or efficient. If a company possesses a
competitive strategy to be more responsive then it can locate its inventories
close to its customers.

Component of inventory decisions

1. Cycle inventory
2. Safety inventory
3. Seasonal inventory
4. Sourcing

Problems faced by a facilities manager

The basic problems that managers come across while making decisions is
between the cost of the number, location and type of facilities and the level of
responsiveness that these facilities provide the company’s customers.


Role of transportation in the supply chain

Transportation moves a product between different stages in a supply chain,

and has a great impact on the efficiency and responsiveness of a supply
chain. Quick transportation of goods through various modes or different
quantities increases the responsiveness however lowers the efficiency.

Role of transportation in competitive strategy

The role played by transportation in a company’s competitive strategy comes

into effect prominently when the company considers the targeted customer’s

demands. If a company’s competitive strategy is to be more responsive to its
customer’s and if the customer’s are willing to pay for it, then the company
needs to be highly responsive.

The role played by transportation in a company’s competitive strategy comes

into effect prominently when the company considers the targeted customer’s
demands. If a company’s competitive strategy is to be more responsive to its
customer’s and if the customer’s are willing to pay for it, then the company
needs to be highly responsive.

Components of transportation decisions

 Mode of Transportation
 Selection of routes and network
 In house or outsourcing

Role played by information in a supply chain

Information has no physical presence, unlike facilities, transportation and

inventory. It has no physical presence, and yet this driver plays an important
role in the supply chain and thus its value to the supply chain must not be

The information as a driver of the supply chain plays a very important role in
the proper functioning of the supply chain and this can be explained with the
help of the following reasons:

 Information is collected at each and every stage of the supply chain, this
information is very vital as it helps the supply chain to rectify itself at any
of the stages and helps the supply chain to reconfigure itself, thereby
maximising the supply chain profitability.
 The day-to-day operation of any facility requires proper analysis of the
information available so that production schedules can be made. The

information that is available helps the company to produce on time,
maintain a good inventory and also provide.

Role played by information in the competitive strategy

Information, as a driver has much importance in companies nowadays. This is

because it is the information that a company has, that helps it to decide
whether or not a company needs to be more responsive or efficient and
thereby have a profitable supply chain. Information is an important driver as it
helps to reduce costs and improve responsiveness within a supply chain.

Components information decisions

The key components of information as a driver of supply chain, which have to

be analysed by managers thoroughly before taking any decision. These
components are as follows,

1. Push versus pull

2. Forecasting & proper planning
3. Information sharing & co-ordination
4. Pricing & managing revenue
5. Technology

Obstacles in Strategic Fit Achievement

In order to achieve a strategic fit, a company needs to strike a balance

between efficiency and responsiveness. In its endeavour to achieve this
strategic fit, the company needs to understand what the customer wants, on
the basis of which the company should place itself on the responsiveness

The obstacles are becoming dynamic creating more difficulties for companies
to create a proper balance. On the other hand they have also helped the
companies with increased opportunities to improve on the supply chain
management. Thus, managers have to play a very important role in tackling
these obstacles in order to turn it to an advantage and in turn increase the
profitability of their supply chain. Obstacles can be of various types some of
which are as under:

 Increase in product variety: The demand of customers has been

continuously increasing. There has been a continuous increase in the
demand for customised products.
 Increase in demanding customers: ‘Customer is King’ in today’s world.
There has been an increase in the number of customers who constantly
demand improved services like timely delivery, cost, product
performance, discounts and shorter lead times.
 Smaller product lifecycles: With the increase in the number and types of
products demanded, there has been a decrease in the life cycles of a
large number of products. Today, there are products whose lifecycles
can be measured in terms of months, like mobile phones and computers
unlike products that would remain in the market for years and years.
 Effect of globalisation: The removal of trade restrictions by various
governments has enabled increased Global Trade. The effects of
globalization on supply chains have been tremendous and have also
provided supply chains a broader environment to work in. Firstly,
 Difficulty in execution of strategies: The creation of a successful supply
chain strategy is not very easy. The formulation of the strategy may be
easy; however the execution of this strategy is most difficult. The
successful execution of a supply chain strategy involves the skillful
ability of employees and managers at each and every level of the

It is observed that these obstacles make it more difficult for any company to
achieve a strategic fit by creating a balance between responsiveness and
efficiency in the supply chain.


Understanding Strategic Supply Chain Management

Supply Chain Strategy or Strategic Supply Chain Management is defined as:

"A strategy for how the supply chain will function in its environment to meet
the goals of the organization’s business and organization strategies". There’s
a kind of magic in some words, “strategy” and “strategic” being key examples.
Place “strategic” in front of the name of any business process and suddenly
that process acquires an aura of great importance. Strategic objectives cry out
to be achieved in a way that simple objectives do not. Strategic planning
sounds considerably more sophisticated and powerful than plain old planning.
There’s a reason those words have such power. Strategy, originally a military
term, is how generals marshal all available resources in pursuit of victory.
Strategy wins football games and chess matches—or loses them.

It’s really the same in the business world. Each company has a business
strategy that paints a broad picture of how they will compete in the
marketplace. Since business strategy is like military strategy in that it requires
the marshaling and organizing of all its resources, then it becomes clear that
the business’s supply chain can be its most potent strategic resource.
Designing and building the right supply chain, one that promotes the business
strategies, may just be the most powerful way to gain an edge on the
competition, to move faster, deliver more value, and be more flexible in the
face of both steady change and surprises. The supply chain strategy is a
complex and evolving means that organizations use to distinguish themselves
in the competitive contest to create value for their customers and investors.

As illustrated in figure mentioned below, you can see how the direction of a
firm or organization is predicated on its business strategy. Of course many
organizations now also use mission and vision statements to give clarity to
their purpose.

If these strategies are not aligned, the direction and fit will be askew. All three
strategies are linked and dependent.

Business strategy:

A plan for choosing how to compete. Three generic business strategies are:

 Least cost.
 Differentiation.
 Focus.
Organizational Strategy:

The strategy of an enterprise identifies how a company will function in its

environment. This supply chain strategy specifies how to satisfy customers,
how to grow the business, how to compete in its environment, how to manage
the organization and develop capabilities within the business, and how to
achieve financial objectives.

Prior to discussing organizational and supply chain strategy in more detail, the
first topic in the section addresses business strategy and competitive
advantages. Competitive advantages are closely related to business strategy
because they outline the advantages the organization should realize once it

has decided how it will compete. Other concepts covered in this section

 Organizational and supply chain strategy.

 Prioritization options.
 Organizational capabilities.
 Alignment of capabilities and strategy.
 Resolving misalignment or gaps.

Strategic Supply Chain Management:

Business Strategy:

Typically a business strategy among supply chain strategies will outline how to
grow the business, how to distinguish the business from the competition and
outperform them, how to achieve superior levels of financial and market
performance, and how to create or maintain a sustainable competitive edge.
As per the definition provided previously, business strategies include least
cost, differentiation, and focus. Least cost relates to a lower cost than the
competition for an otherwise equivalent product or service. Differentiation
relates to a product or service with more features, options, or models than the
competition. Focus relates to whether the product or service is designed for a
broad audience or a well-defined market segment or segments. There are
many ways that these generic strategies can be combined or made into
hybrids. For example, common business strategies that are generic to many
industries and manufacturers include the following variations:

 Best cost—creates a hybrid, low-cost approach for providing a differentiated

product or service.
 Low cost—focuses on delivering low price and no-frills basics with prices that
are hard to match.
 Broad differentiation—creates product and service attributes that appeal to
many buyers looking for variety of goods.

 Focused differentiation—develops unique strategies for target market niches
to meet unique buyer needs.
 Focused low cost - designed to meet well-defined buyer needs at a low cost.

Competitive Advantages:

Competitive advantages mirror the strategies used to create them: A

competitive advantage exists when an organization is able to provide the
same benefits from a product or service at a lower cost than a competitor (low
cost advantage), deliver benefits that exceed those of a competitor’s product
or service (differentiation advantage), or create a product or service that is
better suited to a given customer segment than what the competition can offer
(focus advantage). The result of this competitive advantage is superior value
creation for the organization and its customers. If this advantage is
successfully implemented and marketed, it should result in improved profits
and market share.

Focus Advantage Strategies:

The following discussion is divided into two ways to create a focus advantage:

 Niche marketing (versus mass marketing).

 Responsiveness.

Niche Marketing (vs Mass Marketing)

Firms can choose to develop products and services for a mass market or for a
relatively small slice of a larger market - a market niche. Some examples of
niche market approaches include

 Catering to high-net-worth customers with products such as luxury

automobiles, yachts, large homes, or specialized services such as estate
planning, personal training, or expensive cruises.

 Designing for a limited age group, such as children or senior citizens with
special needs instead of serving a broader population.
 Providing products or services for residents of a particular geographic area,
such as growing vegetables for a neighbourhood market rather than for
packaging and shipping around the nation or world.

Niche marketing shares some characteristics with product service

differentiation. In both cases, the product or service provided to customers has
special features. Differentiation by quality, for example, can be the same thing
as catering to high-net-worth customers. (Low-net-worth customers, or value
shoppers, can also be niche.) Therefore, some supply chain strategies will
work for both approaches. Collaboration to achieve distinctive design is one
example. Depending upon the niche, sourcing may focus more on finding
special expertise or high-quality materials rather than on low-cost labor.


Perhaps the most obvious example of responsiveness is the fast-food industry

that grew up in the last half of the 20th century, led by McDonald’s. Diners at
fine restaurants will happily wait half an hour for their specially cooked steak,
but employees on short lunch breaks become impatient with even a few
minutes in line as their sandwiches are prepared, using the supply chain
strategy. In the early days of the Toyota Prius automobile - a highly
differentiated car—buyers were known to wait for months for a new vehicle.
(The same phenomenon occurred when the Volkswagen “Beetle” first came to
the United States, where it was both highly differentiated and a low-cost
option.) But businesspeople or diplomats on assignment expect a rental car or
limousine to be ready immediately when they arrive at the airport.
Manufacturers of clothing prosper or go bankrupt by their ability to bring the
latest seasonal designs to market rapidly. Perishable products, such as raw
food items, must be delivered rapidly, unlike preserved foods. Services may
also compete on the basis of speed by cutting time spent waiting on the
phone, standing in line, or processing paperwork.

Supply chains designed for responsiveness may rely on substantial supplies

of safety stock to avoid outages. (Overstocked seasonal items typically go on

sale at the end of the season.) They may also have multiple warehouses to
place products nearer to users. Third-party providers of rapid transportation,
such as package delivery services, were developed to suit the needs of such
supply chains.

Choosing Business Strategies:

While some firms may focus primarily on one business strategy, others may
pursue a mix of strategies. Note, however, that making one strategy the
priority may make other strategies difficult to achieve. For example, providing
high quality at the lowest price is a challenge. But not all the strategies are
mutually exclusive. Product differentiation and niche marketing fit well
together. Either responsiveness or low cost may be a key competitive factor
that differentiates a firm from its market rivals.

Once an organization has decided on a business strategy, it uses these

choices to drive the organizational strategy and eventually the supply chain

Organizational and Supply Chain Strategy, Prioritization, Capabilities, and


Organizational Strategy:

Recall that the supply chain strategy of an enterprise identifies how a

company will function in its environment. The strategy specifies how to satisfy
customers, how to grow the business, how to compete in its environment, how
to manage the organization and develop capabilities within the business, and
how to achieve financial objectives.

Where do you start when building an organization’s strategy? As author and

business consultant Stephen R. Covey says in The Seven Habits of Highly
Effective People, “begin with the end in mind,” that is, think first about the
goals of the supply chain strategy.

Goals of Organizational Strategy:

Whatever strategy the corporation adopts to satisfy customers, grow,

compete, organize itself, and make money, the supply chain has to operate in
a manner that furthers those goals. To give a simple example, if customers
are clamoring for deeply discounted prices on durable, high-volume goods
with stable demand, a supply chain strategy that invests heavily in sourcing
lower-cost materials in emerging markets would be on target for
accomplishing that goal. Low-cost sourcing is probably the best option for this
strategy because purchasing machines involves a high capital investment and
lower labor expenses could help offset the investment costs. However, you
might also look into investing in equipment, as the high investment is covered
by lower labor costs and increased revenue. (It is possible for an organization
to do both¬ invest in automation and move into a geographic area where labor
costs are less. That decision would be based on volume, payback period,
product life cycle, etc.).

Horizontal supply chains will contain a number of independent organizations,

each with its own goals, processes, operations, technology, and strategy. So,
when we refer to the necessity of aligning supply chain strategy with
organizational strategy, we are referring to the strategies of a channel master
or nucleus firm. Traditionally, that’s the manufacturer of a product—the
company that sits right at the center of the chain (or network) with suppliers in
tiers on one side and customers on the other.

However, if a supply chain has a dominant firm with a dominating supply chain
strategy (one that is dictating its requirements to others), for example, a large
retailer, then supplier and manufacturer strategies and goals must align with
that retailer’s organizational and supply chain strategies. The suppliers of
suppliers also have strategies to be brought into alignment. Finally, the
strategies, once aligned, have to do two things: serve the end customers’
needs and be profitable for the chain as a whole and each company

The following looks at four types of organizational strategy in detail: customer

focus and alignment, forecast-driven enterprise, demand-driven enterprise,
and number of supply chains.

Supply Chain Strategy: Customer Focus and Alignment

When it comes to supply chains, it’s what’s good for the customer that counts
not what’s good for the nucleus company or even what seems to be good for
the supply chain itself Supply chain management needs to be focused on
giving the final customer the right product at the right time and place for the
right price. It isn’t necessarily about the most advanced product or service, nor
is it always about the lowest price, the fastest time, or the most convenient
place. It’s about the balance of quality, price, and availability (timing and
place) that’s just right for the supply chain’s customer.

How does one determine what is the right amount of each of those factors?
There isn’t a simple formula that will help the supply chain manager with this
decision. But there are some basic premises that will help you get started in
determining the appropriate balance:

 Serving the end-user customer is the primary driver of supply chain decisions.
 Organizations in the supply chain have to make a profit and stay in business
to serve the customer.

Functional teams in the organization will provide their input and research on
the optimal balance for the supply chain to meet customer needs. Design
engineers - or, better yet, design teams from across the network—design
products that are right for the end customer and can be sold profitably. Market
research looks for the true, and not always obvious, needs in potential
consumers that the supply chain can be engineered to satisfy profitably.
Logistics supply chain strategy begins with data about customer demands for
availability—of materials, components, service, or finished products,
depending upon the customer—and then it looks for ways to move products in
a cost-effective way with acceptable risk.

Decisions are not just about product features or price or speedy delivery. They
are about the right features at the right price on the right schedule. DOS was
not a great operating system; it was just the right operating system for the time
and the market.

The term “customer” can be a complex concept in relation to supply chains

because there are multiple customers with different stakes in the process.
When we talk about customer focus, we mean the end user, the consumer of
the product. But usually only the retailer actually sees the end user and has a
direct relationship with that person or entity.

Everyone else in the supply chain has a more immediate customer just
downstream to our right in the supply chain diagram. If the supply chain is
completely aligned in its focus on the end customer, then, at least in theory,
serving the customer just to an organization’s downstream side would
automatically serve the end user and also be in the supplying organization’s
best interest as well as the interest of investors.

Moreover, within each supply chain partner there are internal “customers”
whose needs also must be aligned with corporate and supply chain strategies.
Each manager must understand his or her role in making the supply chain
profitable, and staff, too, must be rewarded, motivated, and trained in
alignment with the needs of the supply chain’s end customer.

Consider sustainable supply chain management. Successfully managing for

sustainability requires a strategic mindset, involving numerous personnel and
financial resources and a commitment from suppliers from first to lower tiers of
the supply chain as well as consumers further up the supply chain.
Departments must cooperate with other departments in their organization
(e.g., purchasing and environmental or design departments) and with their
counterparts at suppliers. This type of collaboration between supply chain
partners necessitates breaking down cultural barriers and building a culture of
trust to ensure that the focus is on end-to-end supply chain activities and not
just discrete supply chain processes. Creating and managing a sustainable
supply chain requires an organization to be informed, exercise leadership, and
cooperate with all supply chain partners in achieving positive results on the
triple bottom line.

Supply Chain Strategy: Forecast-Driven Enterprise

A second organizational strategy is the forecast-driven enterprise. Simply put,

this strategy is one in which the nucleus firm, usually their manufacturer,
utilizes a forecast, an estimate of future demand, as the basis of its
organizational strategy.

Here is the complicating factor: It is difficult to know what customer

requirements will be from day to day, month to month, quarter to quarter, and

so on. For instance, if a manufacturer was guaranteed that its wholesale or
retail customers were going to need 1,000 SKUs (stock keeping units) every
Wednesday afternoon, then getting those products to customers at the right
time and place would be a matter of simple calculation based upon lead times
for production and delivery. In turn, the manufacturer would look at the bill of
material, determine the lead time for each, and submit schedules to its
suppliers. Unfortunately, it’s difficult to predict even the most stable demand—
say, for a product like diapers. There is some variability in demand for diaper,
even though they aren't subject to seasonal style changes or rapid peaks and
valleys in response to outside influences affecting ability to pay. (That’s why
Procter & Gamble cooperates with Wal-Mart to plan for demand and
replenishment of diapers.) The chain of demand begins at the far retail end of
the supply chain and works its way back toward the source of raw materials
used in making the product. The traditional way of attempting to satisfy this
demand is to forecast it.

In this retail example, forecasting along the chain works like this:

 The retailer forecasts demand from parents who purchase diapers.

 The wholesaler forecasts demand from all its retailers.
 The manufacturer forecasts demand from the wholesale distributors.
 The component suppliers forecast demand from manufacturers.
 The raw materials suppliers forecast demand from the component

How effective is this supply chain strategy? Let’s say you don’t want to be
placing large bets on the accuracy of all those forecasts. Here’s what actually

 Parents vary their diaper-buying patterns in fairly small increments due to .

factors nobody fully understands. They may go to different stores for a
change, shop on Tuesday instead of Wednesday, or buy two or three weeks’
worth at one time because the diapers are on sale. So, actual demand never
quite meets the forecast

 Meanwhile the retailer had already ordered enough to allow a little extra
“safety stock” to put in its storeroom. (For retailers, safety stock is a quantity of
stock planned to be in inventory to protect against fluctuations in demand or
supply.) Or maybe the retailer runs a promotion that is not communicated to
the distributor, thus resulting in needing a larger order than was previously
forecasted. These fluctuations impact forecasting for the distributor.
 The wholesale distributor had forecasted demand based on past orders from
its retailers. But now those demand patterns have a wider variability than the
demand pattern at the retailer’s checkout counters due to that safety stock the
retailer held on to. Sometimes the safety stock accumulates because demand
is less than the forecast, and this means that the retailer’s next order is for
less than its forecast—or perhaps it doesn’t have to order at the usual time at
all, because it has a glut of diapers—which it probably sells off in a promotion.
The upshot of all this is that the small variations in end-user demand are
magnified at the distributor.
 Up the chain, the manufacturer of those diapers looks at the demand pattern
from the distributor and makes its own forecasts, which show an even wider
swing in variability.
 And this variability goes up the chain with ever-wider swings.

As mentioned earlier in this chapter, this pattern of variability is called the bull-
whip effect, and it affects all manner of supply chains that are based on serial
forecasting by each independent division or firm that touches the product as it
travels from raw material to finished retail item.

Strategy: Demand-Driven Enterprise

The next organizational strategy we’ll look at is the demand-driven enterprise.

The bull-whip effect is driven by demand forecasts; the solution is to replace
the forecasts with actual demand information. This isn't necessarily a simple
matter either, but supply chain professionals have evolved techniques for
letting actual orders (not forecasts) drive production and distribution. In the
demand-driven chain, supply management is focused on customer demand.
Instead of manufacturers planning their operations based on factory capacity
and asset utilization, the demand-driven supply model operates on a
customer-centric approach that allows demand to drive supply chain planning
and execution—moving the “push-pull frontier,” as it’s called, back up the
chain at least to the factory. Instead of producing to the forecast and sending
finished products to inventory, the production process is based on sales
information. There is, in other words, no fixed production schedule in a strictly
demand-driven supply chain. Product is turned out only in response to actual
orders, “on demand,” in other words. (Note, however, that on the supplier side
of the plant, forecasts still determine delivery of raw material. The art of
forecasting remains crucial, even in a demand-driven chain.)

This is also known as a “pull system,” and it entails the following:

 In production, the production of items only as demanded for use or to replace

those taken for use.
 In material control, the withdrawal of inventory as demanded by the using
operations. Material is not issued until a signal comes from the user.
 In distribution, a system for replenishing field warehouse inventories where
replenishment decisions are made at the field warehouse itself, not at the
central warehouse or plant.
 When a supply chain works in response to forecasts, it’s called a “push” chain,
and it entails the following:
 In production, the production of items at required times based on a given
schedule planned in advance.
 In material control, the issuing of material according to a given schedule or
issuing material to a job order at its start time.
 In distribution, a system for replenishing field warehouse inventories where
replenishment decision making is centralized, usually at the manufacturing
site or central supply facility.

Everything in a push system is pushed downstream from one point to the next
according to schedules based on the forecasts. The supplier delivers
components in the amounts determined by the schedule to inventory, where
they await use in manufacturing. The plant turns them into finished products
and pushes the products to the distribution center or the retailer, where they
await an order from downstream.

The challenge in changing from forecast-driven (push) to demand-driven (pull)

systems is in reducing inventory without also lowering customer satisfaction.
When a demand-driven system is set up and managed properly, it can
actually enhance customer service while reducing costs. But stockouts are a
risk. As always with supply chains, the decision to switch to a demand-pull
process trades one type of risk for another:

 In the forecast-push process, the risk is related to the build-up of inventory all
along the chain. Not only does inventory cost money while it sits in a retail
stockroom, distribution center, or preproduction storage area; it runs the risk of
becoming Obsolete or irrelevant for a number of reasons. In a world of sapid
innovation, inventory obsolescence is a very real threat. (For example, Cisco
Systems, for years an exemplar of successful and innovative supply chain
management, had to dispose of US$2.25 billion worth of useless inventory
when the dot-coin bubble burst at the beginning of this millennium. All those
season close-out sales you see in clothing and department stores are a way
of clearing out the overstock. Bookstore remainder tables (which are much
less in evidence than they were a decade or two in the past) are a sign of
inventory overhang caused by failed forecasting.
 Magazine distributors used supply chain strategy to destroy huge quantities of
monthly magazines 12 times a year when they came back from retail outlets.
(Since magazines are inexpensive to produce and destroy compared to their
retail price, the distributors would rather destroy ten copies than miss one
sale.) Those are the results of producing to forecasts that no one trusts and
purposely overstocking to be sure of meeting unexpectedly high demand.

 In the demand-pull, make-to-order model, on the other hand, the risk is that
orders will begin to come in above capacity and al/ along the chain there will
be expensive activity to run the plant overtime, buy more and faster
transportation, or sweet-talk customers into waiting for their orders to be filled
or substituting a different product. (Running short of stock is also a risk in the
forecast-driven chain. Forecasts can be wrong in either direction. That’s why
the safety stock builds up at each point where orders come in.) One technique
to prepare for uncertain demand is kitting, which is preparing
(making/purchasing) components in advance, grouping them together in a
“kit,” and having them available to assemble or complete when an order is

In Gartner’s annual supply chain report, they rank the top 25 demand-driven
supply chains, thereby underscoring the importance of this strategy. In fact,
the companies that gain a position on this list have all applied demand-driven
principles to coordinate supply, demand, and product management to better
respond to market demand. If you would like additional information about this
report, a link is provided in the online Information Center.

In reality, most organizations pursue a push-pull supply chain strategy and the
point where push moves to pull is the key strategic decision. Once that
decision has been made, building a demand-driven enterprise can require
significant changes in all supply chain processes. The following are some
major steps:

 Provide access to real demand data along the chain for greater visibility of the
end customer. The first requirement is to replace the forecasts with real data.
The only supply chain partner with access to these data first hand is the
retailer, and retailers in the past have been no more willing to share business
data than any other firms. The other partners lack “visibility”—one of the main
supply chain principles. They simply cannot see what’s going on with the end
customer. But visibility supply chain strategy is a necessity for building a pull

system, and pioneers like Wal-Mart have led the way in that regard. With
point-¬of-sale scanning or radio frequency identification (RFID), a retailer can
alert its suppliers to customer activity instantaneously. Instead of producing to
the monthly forecast, manufacturers with that kind of immediate signal from
the front lines can plan one day’s production runs at the end of the preceding
day. They produce just enough to replace the sold items.
 Establish trust and promote collaboration among supply chain partners.
Collaboration is implied in the sharing of information. But more is at stake than
simply sharing sales information. Partners may have to invest in new
technology and develop new systems to be able to use the real-time data.
With orders going out without a schedule, all processes will have to be
altered—warehousing (storage no longer needed), packaging, shipping, and
planning will all be handled differently in the new system. In return for
receiving real-time data that allow reduction of inventory; suppliers and
distributors have to agree to change their processes in whatever ways may be
necessary to make the new system function without disrupting customer
 Increase agility of trade partners. Because the inventory buffers will not exist
or will be much reduced in this demand-driven supply chain, the trade partners
need to develop agility—the ability to respond to the variability in the flow of
orders based on sales. The plant, for example, may have to undergo
considerable change if it has to produce several different kinds of products
under the new circumstances. When making to forecast, a plant can run a
larger volume of each product to send to inventory. But when making to order,
the plant may have to produce several different types of products in a day.
There will be no room for long changeover times between runs of different
products; therefore, equipment, processes, work center layouts, staffing, or
siting—or all these things—may have to change to create the capacity
required to handle the new system.

Strategy: Number of Supply Chains

The last strategy we’ll cover is based on a company having more than one
supply chain, depending upon the number and types of products that are
passing along the chain and other variables. For a product with a complex bill
of material (many parts that combine into many components to make the final
product), a manufacturer may be bringing in materials from many suppliers.
And these materials might range from low-priced commodities to fragile or
sophisticated materials that require special shipping and handling. Suppliers
might range from small specialized firms to raw materials giants larger than
the manufacturer. Some are key accounts; some might be occasional buyers.
The finished products may be sold through several different channels—c-
commerce, printed catalogs, commercial, and retail. These variables may
combine in different ways, each suggesting its own type of supply chain
strategy. Next we’ll explore how product types, functional versus innovative,
often require different supply chain strategies.

In “What Is the Right Supply Chain for Your Product?” Marshall L. Fisher
distinguished two types of products, functional versus innovative, that require
different supply chain strategies. Functional products that change little from
year to year have longer life cycles (perhaps more than two years), relatively
low contribution margins, and little variety. Because demand for them is
stable, they are fairly easy to forecast, with a margin of error of about 10
percent, very few stockouts, and no end-of season markdowns. The
appropriate supply chain for these products should emphasize predictability
and low cost with performance indicators such as the following:

 High average utilization rate in manufacturing.

 Minimal inventory with high inventory turns.
 Short lead time (consistent with low cost).
 Suppliers chosen for cost and quality.
 Product design that strives for maximum performance and minimal cost.

However, make-to-order functional products, such as replacement parts for

customized equipment, usually have long lead times (six months to a year).
Innovative products have unpredictable demand, relatively short life cycles
(three months for seasonal clothing), and high contribution margins of 20 to 60
percent. They may have millions of variants in each category, an average
stockout rate from 10 to 40 percent, and end-of-season markdowns in the
range of 10 to 25 percent of regular price. The margin of error on forecasts for
innovative products is high-40 to 100 percent—but the lead time to make them
to order may be as low as one day and generally is no more than two weeks.
The supply chain for innovative products should emphasize market
responsiveness rather than physical efficiency, with performance indicators
such as the following:

 Excess buffer capacity and significant buffer (or safety) stock of parts or
finished items.
 Aggressive reduction of lead times.
 Suppliers chosen for speed, flexibility, and quality (rather than cost).
 Modular design that postpones differentiation as long as possible.

Innovative products, with their high margins and unpredictable demand, justify
the extra expense for holding costs. (Fisher also proposes, however, that
manufacturers of innovative products can look for other solutions to the
problem of unpredictable demand, such as aggressively reducing lead times
and producing products to order rather than for inventory.)

Here is a conundrum... What happens when a product can fall into either
category? Fisher says that some products can be either innovative or
functional. Automobiles fit that description, with a low-priced, no-frills car like a
base model Chevrolet Cobalt or Hyundai Excel representing the functional
end of the spectrum and a Porsche representing the other end. Similarly,
coffee can be functional—as anyone who has worked in an office knows, in
which case it should be available quickly at a low price with perhaps cream
and sugar as options. At a high-end coffee shop, on the other hand, patrons
are willing to endure longer lead times and pay more money for their coffee,
but they want variety in return.

The idea that the same type of product can be either functional or innovative
implies that one company might have more than one supply chain. And that’s
the contention of Jonathan Byrnes, a professor at MIT. Writing in the Harvard
Business School’s Working Knowledge, Byrnes asserts that one supply chain
is not enough; two, three, or more would be preferable. “One size fits all”

supply chains may have been sufficient in the past, he believes, when that
was the competitive norm, but new information technology makes it possible
to have multiple, dynamic chains that can accommodate different product and
information flows.

Byrnes breaks products into three categories: staples, seasonal products, and

 Staples (which are much like Fisher’s functional products) have steady, year-
round demand and low margins. White underwear is an example. Byrnes
advises stocking staples only in retail outlets in small quantities and
transporting them in truckload quantities. (A full truck, is more cost-effective
for the shipper than a partially loaded vehicle.)
 Seasonal products could include outdoor patio furniture, holiday decor, etc.,
for which the demand is more predictable since it is tied to the holiday season.
 Fashion products are like Fisher’s innovative items, with unpredictable
demand. Zara, the Spanish clothing manufacturer, has two supply chains, one
for staples and the other for fashion clothing. To get the fastest response time,
Zara uses European suppliers for the fashion items. But for the more
predictable demand items, it uses eastern European suppliers that have poor
response time (not a concern) and lower cost.

In addition to varying the supply chain by product type, Fisher recommends

several other variables to consider—store type and time in season or product
cycle. Demand varies considerably over the life cycle of many products. The
same item might have infrequent demand at first, more stable demand in its
maturity phase, and falling demand at the end of its life cycle. With more than
one supply chain, the nucleus firm can move its products from one chain to
the other in response to changing variables, such as type of channel or life-
cycle stage. Business and organizational strategies are formalized and clearly
specified within an organization’s business plan, so this is discussed next.

Business Plan

A business plan is a written document that describes the overall direction of

the firm and what it wants to become in the future. A business plan is defined
in part as follows:

A statement of long-range strategy and revenue, cost, and profit objectives

usually accompanied by budgets, a projected balance sheet, and a cash flow
(source and application of funds) statement. A business plan is usually stated
in terms of dollars and grouped by product family. The business plan is then
translated into synchronized tactical functional plans through the production
planning process (or the sales and operations planning process). Although
frequently stated in different terms (dollars versus units), these tactical plans
should agree with each other and with the business plan.

The business plan provides general direction regarding how the firm plans on
achieving its long-term objectives. Key functions such as finance, engineering,
marketing, and operations typically have input into the plan. The overall
strategic plan cascades down to those same functions.

The finance function manages and tracks the sources of funds, amounts
available for use, cash flows, budgets, profits, and return on investment.
Engineering is responsible for research and development and the design and
redesign of products that can be made most economically. Marketing’s focus
is on analysis of the marketplace and how the firm positions itself and its
products. (You will learn more about the role of marketing in the next section.)
The goal of the operations function is to meet the demands of the marketplace
via the organization’s products. Operations also manages the manufacturing
facilities, machinery, equipment, labor, and-materials as efficiently as possible.
These functional roles collectively support the success of the supply chain.

The business plan is based on and aligned with the business strategy and
with market requirements. It provides a framework for the organization’s
performance objectives that are tied to strategic goals. In the ideal world,
formation of and changes to the business plan come from top management’s
modifications to the business strategy and organizational strategy. But in
reality that may not always be the case. This topic is discussed in more details
in the scm certification and mba logistics and supply chain
management programs. These programs are offered by AIMS' institute of
supply chain management.

Supply Chain Strategies:

The supply chain has the overarching goal of providing customers with goods
and services when they want them, at a competitive price, while being
consistent with the organization’s and extended supply chain’s strategies. If
the supply chain cannot successfully execute this supply chain strategy, the
business, or product line, may cease to exist.

When you think about the role the supply chain plays in the bigger context of
your company, the functional strategies underlying supply chain management
must articulate with the business plan, and remember also that the purpose of
supply chains is to be globally competitive. Time, distance, and collaboration
are basic elements in modern supply chains that impact the chain’s ability to
respond to competitive changes in the global marketplace. The relationships
of time, distance, and collaboration weave like three bright threads through the
fabric of any supply chain on the globe. Therefore, collaborative relationships
are explored further as they are a primary component of supply chain strategy.




Within any given supply chain, it is important to be able to have the correct
amount of materials, equipment and labor required to complete any given
production, process or manufacturing order with optimal efficiency.

Timely arrival and departure of these production assets is also vital in order to
make certain that all inventory and labor are in the right place at the right time.
This all comes down to what is, arguably, the most vital aspect of the supply
chain - "supply chain planning."

Supply chain planning within a production facility or operation is the

groundwork for the activity both inside and outside of the facility - and then
there are multi-plant operations that requires planning for synchronization of
disparate production plans. This is supply chain planning.

Without a comprehensive operations plan for production, the operation does
not have proper foresight and coverage established for all of the potential
"what-ifs" that are capable of occurring. A proper operations plan can provide
contingency sub-plans for common points of failure. Equipment malfunctions,
weather, personnel absenteeism can all upset the apple cart for the day's or
week's output. Finding ways to further enhance supply chain planning
methods can benefit a facility enormously.

Supply Chain Planning strategies and methods include:

 Data Gathering - Precise figures and data allow for an insight into the supply
chain. With up-to-minute and real-time data, critical resolutions can be made
 Lean Principles - Just-in-time supply management enables a decrease in
inventory cost. Fulfillment of orders and overhead cost will be eradicated,
allowing for inventory to have a much more steady flow.

 Increased Visibility - Supply chains often contain inevitable mishaps such as
waste and miscalculation. An increase in operational visibility can reduce the
amount of missing inventory or out of spec waste. It adds-up and efficient
handling of these losses to efficiency can require a male-up plan in order to
meet production
 Standardization - Obtaining an ERP system that enables efficiency growth
will help the supply chain in the short and long run by increasing revenue.
Along with a planning system, locating a software that is comprehensible
within a team promotes overall coalition and will curtail mistakes in the future.

There is a fair amount to account for in the planning process of supply chain.
A multitude of facilities, if not all, are looking for ways to become better
prepared for unforeseen obstacles and circumstances in their supply chains
and similar challenges within their own respective location in the supply chain
of their clients. Without some sort of a comprehensive plan, a facility might
completely fail at order fulfillment; production suffers when the first unforeseen
hurdle presents itself. This is exactly why obtaining an ERP system or system
add-on that has suitable planning and production scheduling that can achieve
the amount of comprehensive planning required is vital to profitability and
timely order fulfillment. ERPs, typically, only go so far.

Facility wants and needs may not entirely match-up with any given in-house
ERP system; therefore locating appropriate add-ons, such as advanced
planning and scheduling systems (APS) can tend to fill gaps in those
operational wants and needs that may be lacking. With an advanced planning
and scheduling system, it can extend a given ERP system into a full-on supply
chain planning and scheduling system for supply chain management (SCM).
APS systems augment ERP systems with predictive analysis, simulations, and
what-if scenario construction is one versatile feature of some APS systems
offer, yet most ERP systems tend to lack with fine detail. APS systems tend to
benefit production operations substantially through improved delivery
performance, profitability, and reductions in inventory and labor cost.


Supply Chain Basics: Utilizing the Planning Process to Optimize

Business Performance

It is not unusual to observe businesses of all kinds taking the view of their
supply chain and manufacturing networks as a necessary evil. In most if not
all cases, the externally facing functions—marketing and sales—get most of
the attention. While finance commands internal respect, the supply chain,
which is intricately woven into every aspect of the business, tends to be the
utilitarian stepchild—meeting demand and controlling costs.

The biggest lever for optimizing business performance is to drive supply chain
excellence by aligning it with business strategy. One of the elementary
components for a high-performing supply chain is a robust set of planning
processes. We see repeatedly in conversations with business partners, a
yearning for improved sales and operations planning (S&OP) processes,
demand planning programs, supply planning that optimizes factory
performance, logistics performance, and the desire for better inventory and
working capital management.

This article is not intended to be a tutorial, but as a quick look at key supply
chain planning elements useful in making the point regarding the pivotal
nature of superior planning processes. To the extent possible, I will attempt to
remove as much jargon as possible from the discussion. All too often in formal

supply chain presentations, there is the propensity to dive so deep into the
details that the key points are lost. It is indeed a complex issue, but we are
trying to not only make the supply chain point, but show how a company and
its performance will benefit from the message.

Blocking and Tackling

Sports analogies abound, but if marketing and sales represent the backfield
and receivers on a football team, the supply chain would be the offensive line,
with planning at the center position. Essentially, the ball cannot be advanced
down the field until it is snapped, and a business can’t perform at its highest
level without a sound planning system.

While I am focusing here on the basics of supply chain planning processes,

there are, of course other key planning elements in a business, not the least of
which is the strategic plan and direction of the company. It goes without
saying that all of the functions in an organization must accurately reflect the
strategic objectives of the business. But with an eye on superior supply chain
performance, another way to look at planning is as a hub, where each spoke
connects to a function, all of which are reliant on a sound planning platform.

Key Supply Chain Planning Elements

Sales and Operations Planning

This is the key business planning element for marketing and sales leaders to
interface with their internally-focused colleagues from finance and the supply
chain. It is through this step, or series of steps, that the business can get input
from all parties regarding product promotions, seasonal customer demand,
innovation performance expectations, and a proper understanding of material
requirements and capacity utilization at the factories.

In essence, this planning step puts the entire business on the same page
regarding the coordination of supply assets and capabilities in order to meet
customer demand requirements for the tactical (60-90 day horizon) and longer
term (12 to 24 months). This process, typically monthly, is supplemented by a
more operational counterpart, the weekly operations process, which focuses
on the same issues at the operational, or zero to 60-day level.

Potential pitfalls and problems can materialize when hidden agendas fail to
unmask complications. For example, the sales group may elect to
underestimate upcoming demand in an attempt to “overdeliver” their revenue
expectations, or they may simply not understand market or customer
conditions. Businesses will often view this ploy as a good problem, but the fact
is that rush shipments, unplanned factory overtime, irritated customers and
value-robbing waste inevitably cut into bottom line profits.

A well run S&OP process can also prevent the business from overselling its
installed capacity to produce finished goods. By understanding both the
demand and supply details of the business, it can better control both revenue
and cost profiles.

Demand Planning

This is an area where we see more confusion and higher levels of inaccuracy
than in any other. If there is a “magic bullet” to improve overall supply chain
performance, this is it. Why? Because demand forecast accuracy equates to:

 Accuracy of inbound materials management;

 Accuracy in manufacturing network utilization;
 Accuracy of inventory management and working capital;
 Accuracy in customer order fulfillment;

which all leads to:

 Better financial management, cost control and less organizational waste.

This is an area where working closely with customers and suppliers can
provide the supply chain with the opportunity to drive incremental value to a
company. Think about the knock-on effects of poor demand planning:
 Supply management needs to generate ongoing contingency plans for the
purchase and delivery of materials to their factory networks, resulting in waste
of time, cash and sub-optimal MRP system performance;
 Incorrect product mix in the wrong region, resulting in wasteful inter-facility
and customer delivery freight costs;
 Ultimately leading to inaccurate supply planning and excessive levels of
safety stock—again more waste of inventory, warehouse space and cash in
the form of working capital;
 And finally, but of utmost importance, customer satisfaction problems.

Supply Planning

Bringing together all of the downstream elements of supply chain performance

is the supply plan. It is here that companies can generate the optimum
performance from their manufacturing, transportation and inventory
management systems. Given that the production network, whether an internal
factory network or third-party manufacturers, is the source of conversion cost
expenses, greater accuracy in the supply plan (driven of course by an
accurate demand plan) invariably leads to fewer line changeovers, (with the
associated reduced downtime), longer run sequences (and the associated
lower waste), higher asset utilization rates, more accurate inventory quantities,
and better on-time deliveries to customers. Oftentimes, accuracy in the overall
planning process allows a company to reduce capital expenditures related to
capacity requirements, since better utilization of installed capacity equates to
a built in increase in system capacity.

The elimination of wasteful downtime, reduction of safety stock levels,

coordination of material flow and inbound freight, knowledge of customer
requirements, and the direction of marketing promotions all yield to a classic
definition of lean operations and manufacturing. This reduction of waste in all
its forms provides the foundation for better margins and higher profitability.

While not as sexy as product innovation, branding exercises, promotions, or

packaging design, dedication to excellent planning systems helps to drive
everything from purchasing efficiency to superior customer service. Powerful
planning processes provide the essential elements for business success
through material management, lean operations, waste reduction and working
capital optimization.



The SCP process begins with creating a demand plan that takes past sales
and future customer forecasts into consideration. Once the demand plan is
approved, it is translated into corresponding planning, execution and shipping
actions. For example, it will pinpoint ship-from locations and customer records
to identify geographic fulfillment needs. This translation is then used to
generate a master production schedule, or supply plan, by item and location.
The supply plan will also cover the required inventory, order, production time
and minimum order quantity data.

SCP is a tactical planning method that prepares organizations for the future.
When done correctly, SCP coordinates assets to best optimize the operations,
manufacturing and delivery of products. These planning processes can be
used to lower production cost, streamline sales and manage relationships
with suppliers.

SCP can also be considered a component of the sales and operations

planning (S&OP) process.

Key supply chain planning elements

 Data collection- Having access to precise, real time data can be used to
improve decision-making processes and manage just-in-time.

 Inventory management- Having updated inventory can enable lean

production principles and lower overhead.

 Inefficiency identification- Having an accurate supply chain production plan

can enable organizations to find inefficiencies such as waste,
miscalculations, missing inventory and unnecessary costs.

 Consumer forecasting- Having a way to document and track customer
sentiment and product demand can improve profitability and margins.

 Supply collaboration- Having a model of all stakeholders and steps

involved in the supply chain will define processes between customers,
suppliers and third-party vendors.

 Product lifecycle management- Having a preapproved demand plan will

bridge the transition from product development to product deployment.

Supply chain planning software

There are software tools available to aid organizations with supply chain
planning. Most SCP software programs offer a supply chain dashboard that
displays critical information such as the inventory of raw materials, orders
processed and finances. These tools make it easy to generate flowcharts or
diagrams to visualize supply chain components and share with relevant
executives accurately.

SCP software can be used to proactively address supply chain constraints or

changes as well as provide real time data updates. Applications can be
integrated into existing transactional or enterprise resource planning (ERP)
systems and can perform what-if scenario analyses. Typical SCP software
tools include network design, capacity planning, demand planning, scheduling
and distribution and deployment planning capabilities.


Demand in SCM

Demand planning is the process of forecasting the demand for a product or

service so it can be produced and delivered more efficiently and to the
satisfaction of customers. Demand planning is considered an essential step
in supply chain planning. Supply chain planning and supply chain execution
are both sub-functions of the planning side of supply chain management.
Sales managers, marketers and manufacturing managers are typically
involved in demand planning. Some companies have dedicated staff with titles
like demand planner and demand planning analyst.

Key steps in demand planning

The purpose of demand planning is to prepare a statistical forecast. A

planning team is usually assembled from the sales, operational and technical

The team starts by reviewing the available information, such as historical data
on sales, market research and surveys, and then agrees on a forecasting
model it believes will be most effective at predicting demand. The team can
then add new data as it comes in, such as actual sales of a product or
competing products, and revise the model and resulting forecasts if

Methods of demand planning

Experts Lora Cecere and Carol Ptak explain how

to more effectively drive supply chains based on
actual demand.

Much of the demand planning process consists of gathering and analyzing

data that can be used to predict demand. Often, this involves collecting point-
of-sale (POS) terminal data and analyzing it with the analytics tools in demand
planning software. Some companies store POS data along with other demand
signals, such as retail and wholesale inventory levels and data from loyalty
programs, in a type of data warehouse called a demand signal repository.

Demand planning is often conducted in the early stages of sales and

operations planning (S&OP), a process for aligning supply with demand by
coordinating sales planning and forecasting with production planning in a
unified approach.

Demand planning vs. demand forecasting

Demand planning has much in common with demand forecasting, though

many experts consider demand planning to go beyond its statistical
forecasting component.

Demand planning is a bit of a misnomer, as much of the actual planning

process occurs during other processes, such as S&OP and material
requirements planning (MRP), which is used to calculate the materials needed
to make a product. Demand planning is very much about figuring out what the
actual demand is now and what it is likely to be in the future.

Both terms are sometimes used as synonyms for demand management, but
they are usually regarded as components of it. Demand management also
includes demand shaping, the process of trying to affect demand through
price changes, product substitution, promotions and other methods.


Push Demand

Push demand is the term given to demand that is built up by the actions of a
seller. Manufacturers and other original sellers create push demand to entice
distributors and wholesalers to give new products a try or to stock up on
existing products with larger-than-normal orders. Wholesalers and distributors
can create push demand through their retailer customers, as well, who in turn
can create push demand through their own customers.

Supply chains must be robust and adaptable enough to compensate for larger-
than-usual loads from time to time due to suppliers generating push demand.

Pull Demand

Pull demand comes straight from consumers. Pull demand is generated when
end-consumers ask for products by name at retail outlets. Recognizing an
opportunity to make money by stocking the requested product, retailers will
request the product from their distributors or wholesalers, who will in turn create
more demand for the original seller.

Supply chain linkages must be adaptable enough to carry new types of products
from new suppliers with short notice to compensate for advertisers generating
pull demand.

Creating Push Demand

Business-to-business sales promotions are a tried-and-true method of creating

push demand. Manufacturers will offer their customers such a great deal on
large orders of new items or other specific inventory that they simply cannot
resist making a large purchase. Manufacturers may entice wholesalers to stock
up on new products by describing a forthcoming advertising campaign or
sharing sales numbers from test markets in addition to offering price discounts.

Creating Pull Demand

Direct-to-consumer advertising is the way to generate pull demand. If a newer

company has trouble getting their unknown products onto retailers' shelves, or
has trouble getting wholesalers to give them a chance, they can use advertising
to get people talking and asking about their products at their favorite retail
outlets. After being asked enough times to stock a particular item, purchasing
managers will think twice about speaking with a previously unknown
manufacturer's sales representative.


Demand Forecasting
Demand forecasting is a combination of two words; the first one is Demand and
another forecasting. Demand means outside requirements of a product or
service. In general, forecasting means making an estimation in the present for a
future occurring event. Here we are going to discuss demand forecasting and its

Demand Forecasting

It is a technique for estimation of probable demand for a product or services in

the future. It is based on the analysis of past demand for that product or service
in the present market condition. Demand forecasting should be done on a
scientific basis and facts and events related to forecasting should be

Therefore, in simple words, we can say that after gathering information about
various aspect of the market and demand based on past, an attempt may be
made to estimate future demand. This concept is called forecasting of demand.

For example, suppose we sold 200, 250, 300 units of product X in the month of
January, February and March respectively. Now we can say that there will be a
demand of 250 units approx. of product X in the month of April, if the market
condition remains the same.

Usefulness of Demand Forecasting

Demand plays a vital role in decision making of a business. In competitive
market conditions, there is a need to take correct decision and make planning
for future events related to business like sale, production etc. The effectiveness
of a decision taken by business managers depends upon the accuracy of the
decision taken by them.

Demand is a most important aspect for a business for achieving its objectives.
Many decisions of business depend on demand like production, sales, staff
requirement etc. Forecasting is the necessity of business at an international
level as well as domestic level.

Demand forecasting reduces risk related to business activities and helps it to
take efficient decisions. For firms having production at the mass level, the
importance of forecasting had increased more. A good forecasting helps a firm
in better planning related to business goals.

There is a huge role of forecasting in functional areas of accounting. Good

forecast helps in appropriate production planning, process selection, capacity
planning, facility layout planning, and inventory management etc. Demand
forecasting provides a reasonable data for the organization’s capital investment
and expansion decision. It also provides a way for the formulation of suitable
pricing and advertisement strategies.

Following is the significance of Demand Forecasting:

 Fulfilling objectives of the business

 Preparing the budget
 Taking management decision
 Evaluating performance etc.
Moreover, forecasting is not completely full proof and correct. It thus helps in
evaluating various factors which affect demand and enables management staff
to know about various forces relevant to the study of demand behavior.

The Scope of Demand Forecasting

The scope of demand forecasting depends upon the operated area of the firm,
present as well as what is proposed in the future. Forecasting can be at
international level if the area of operation is international. If the firm supplies its
products and services in the local market then forecasting will be at local level.

The scope should be decided considering time and cost involved in relation to
the benefit of the information acquired through the study of demand. Cost of
forecasting and benefit flows from such forecasting should be in a balanced

Types of Forecasting

There are two types of forecasting:

 Based on Economy
 Based on the time period
1. Based on Economy
There are three type of forecasting based on the economy:

i. Macro-level forecasting: It deals with the general economic environment

relating to the economy as measured by the Index of Industrial
Production(IIP), national income and general level of employment etc.
ii. Industry level forecasting: Industry level forecasting deals with the
demand for industry’s products as a whole. For example demand for
cement in India, demand for clothes in India etc.
iii. Firm-level forecasting: It means forecasting the demand for a particular
firm’s product. For example, demand for Birla cement, demand for
Raymond clothes etc.
2. Based on the Time Period
Forecasting based on time may be short-term forecasting and long-term

i. Short-term forecasting: It covers a short period of time, depending upon

nature of the industry. It is done generally for six months or less than one
year. Short-term forecasting is generally useful in tactical decisions.
ii. Long-term forecasting casting: Long-term forecasts are for a longer
period of time say, two to five years or more. It gives information for major
strategic decisions of the firm. For example, expansion of plant capacity,
opening a new unit of business etc.


 What is Aggregate Planning ? - Importance and its Strategies
An organization can finalize its business plans on the recommendation of
demand forecast. Once business plans are ready, an organization can do
backward working from the final sales unit to raw materials required. Thus
annual and quarterly plans are broken down into labor, raw material, working
capital, etc. requirements over a medium-range period (6 months to 18
months). This process of working out production requirements for a medium
range is called aggregate planning.
Factors Affecting Aggregate Planning

Aggregate planning is an operational activity critical to the organization

as it looks to balance long-term strategic planning with short term
production success. Following factors are critical before an aggregate
planning process can actually start;

 A complete information is required about available production facility and

raw materials.
 A solid demand forecast covering the medium-range period
 Financial planning surrounding the production cost which includes raw
material, labor, inventory planning, etc.
 Organization policy around labor management, quality management,

For aggregate planning to be a success, following inputs are required;

 An aggregate demand forecast for the relevant period

 Evaluation of all the available means to manage capacity planning like
sub-contracting, outsourcing, etc.
 Existing operational status of workforce (number, skill set, etc.),
inventory level and production efficiency

Aggregate planning will ensure that organization can plan for workforce level,
inventory level and production rate in line with its strategic goal and objective.

Aggregate planning as an Operational Tool

Aggregate planning helps achieve balance between operation goal, financial

goal and overall strategic objective of the organization. It serves as a platform
to manage capacity and demand planning.
In a scenario where demand is not matching the capacity, an organization can
try to balance both by pricing, promotion, order management and new
demand creation.

In scenario where capacity is not matching demand, an organization can try to

balance the both by various alternatives such as.

 Laying off/hiring excess/inadequate excess/inadequate

excess/inadequate workforce until demand decrease/increase.
 Including overtime as part of scheduling there by creating additional
 Hiring a temporary workforce for a fix period or outsourcing activity to a

Importance of Aggregate Planning

Aggregate planning plays an important part in achieving long-term objectives

of the organization. Aggregate planning helps in:

 Achieving financial goals by reducing overall variable cost and improving

the bottom line
 Maximum utilization of the available production facility
 Provide customer delight by matching demand and reducing wait time
for customers
 Reduce investment in inventory stocking
 Able to meet scheduling goals there by creating a happy and satisfied
work force

Aggregate Planning Strategies

There are three types of aggregate planning strategies available for

organization to choose from. They are as follows.

1. Level Strategy

As the name suggests, level strategy looks to maintain a steady

production rate and workforce level. In this strategy, organization
requires a robust forecast demand as to increase or decrease
production in anticipation of lower or higher customer demand.
Advantage of level strategy is steady workforce. Disadvantage of level
strategy is high inventory and increase back logs.
2. Chase Strategy

As the name suggests, chase strategy looks to dynamically match

demand with production. Advantage of chase strategy is lower inventory
levels and back logs. Disadvantage is lower productivity, quality and
depressed work force.

3. Hybrid Strategy

As the name suggests, hybrid strategy looks to balance between level

strategy and chase strategy.


Planning Supply and Demand in the Supply Chain: Managing Predictable

Variability - Review Notes
Chopra and Meindl's book, Supply Chain Management: Strategy, Planning,
and Operation, is a comprehensive introduction on supply chain

For certain products, there is seasonality in demand. Therefore the systematic

component of demand forecasted will vary over the periods in a planning
horizon. The firm can take certain actions to change the variability in demand
and then plan for supplying to varying demand using a more stable capacity.

The main theme in this chapter is that variability in demand should not be
allowed to pass through to operations to supply to that variable as best as
possible. This will not be an optimal policy. Actions to alter the demand
through price discounts and various promotions need to be considered along
with the supply variability actions to maximize the profit. Therefore supply
chain managers and marketing managers have to coordinate their actions to
create an optimal plan for managing the variable demand through both
demand management and supply management actions. The author say
preempt variability in demand rather than passively cater to it.


Attempts are made to change the demand in certain periods through short-
term price discounts and trade promotions.

Such promotions and price discounts give extra sales during some period due
to market growth due to lower price, buyers doing forward buying (buying
requirements are future periods now) and substituting the demand for
competitors' products. (This topic will be discussed in more detail in text books
related to sales and marketing.)

In planning supply for the predictable variable demand, variations in supply

capacity, inventory, subcontracting, and backlog filling are used by firms.

Capacity is altered by in certain periods by using time flexibility of workers,

use of seasonal work force, use of subcontractors to supply peak demand,
use of dedicated facilities and some flexible facilities, and having flexible
production processes.

Inventory is used to build inventory during slack periods to sell during peak
periods. Also, using common components across multiple products could help
to manage demand fluctuations in individual products.


 Customer Service in SCM

Supply chain management is directly related to a company’s customer

service. And if a company has great customer service, it can get a leg up on
the competition. To be successful, a small business must take advantage of
every opportunity it can to stand out from the competition.

How does supply chain management relate to customer service? It is at the
very heart of everything your business does because without strong supply
chains, you will not be able to replenish your inventory quantities at the right
times. You will also struggle to plan ahead for changes in demand and other
factors that can dramatically change the environment your business is working
within. But, on the flip side, if you cultivate and maintain strong supply chains,
you will find that you can better prepare yourself and be in a position to meet
your customers’ expectations.

Good supply chain management is made possible through the aid of inventory
management software, which boosts your company’s customer service by
allowing you to do three key things:

 Deliver products to customers faster and with greater accuracy than you could
with a manual system.
 Track shipments to ensure they reach their destinations safely and on time.
 Maintain optimal inventory levels so you always have the right items in stock
that your customers want.

All three of these strengths help you to build relationships of trust with your
customers. If you consistently make good on your promises and even exceed
their expectations, your customers will be much more likely to keep coming
back to you and they might actually refer their friends to you. This is a
wonderful cycle of retention and word of mouth that not only stabilizes your
business, but helps you to organically grow it and improve your reputation as
time goes by. As economic conditions improve and consumers cautiously
increase their spending, you can put yourself in and ideal position by
optimizing your supply chain management.
Supply chain management is an essential part of inventory management.
Solid inventory management saves time by eliminating time-consuming
processes through the use of automatic reorder points and batch pick tickets.
It also lowers costs by reducing inventory levels to their optimal amounts,
which cuts down on carrying costs and prevents money from being stuck in

slow-moving products. And it boosts productivity by empowering employees to
accomplish complex inventory management tasks with the aid of barcode
scanners and access to detailed inventory records.

The best way to make sure your inventory management and supply chain
management are as strong as possible is by using inventory management
software. Inventory management software helps you keep track of all of your
inventory levels, orders, shipments, and much more. It would be difficult to
measure all of these things by hand and to pull key information from your
memory without any help from a digital system where it is all stored. Inventory
software handles most of the work for you, so you can focus on growing your
business and making your customers happy.


 Customer Service In SCM Another answer

Supply chain is basically considered as a strategic concept that involves

understanding and managing the sequence of activities -from supplier to
customer-that add value to the product supply pipeline. The role of customer
service in the supply chain management is not incidental. Every company in
this chain, irrespective of market size mainly they thankful to its customers as
the fact is that in all profit of firm there are customers are in center whom to
buy the goods and services produced by each one of them. This century
marks the end of monopolies and therefore customers can make an array of
choices. When customers decide not to buy products in a particular supply
chain, then no doubt the company would collapse without earning any
revenue for the expenses incurred in launching the product on the stage of
saturation and decline stage.

So, the supply chain should be structured in such a manner that there is a
common link between the products as such and the end customer. It is
because that the tastes of customers keep changing and their expectations
goes on rising, when product cycle at saturation and decline stage at they
began decreasing ‘brand’ loyalty and put in for anything that attracts them.
Thus the importation must be put on conducting effective market analysis to

know the needs of different groups of customers to whom the offer is to be
made. Its main aim is to polish its contact with the customers. The rationale
behind this strategy is to improve services provided directly or indirectly to its
customers and to use the information in the system for targeted marketing and
sales purposes. A kind of metrics should be used to assess the customer
service, like the company’s ability to fill the orders in limited time or the
delivery of the products on the due date. Other researches can be conducted
to find out the reason for not delivering the products on the due date. There is
no compromise for an act of negligence in meeting customer satisfaction as it
is the customers who ultimately judge the life span of the company. In today’s
fast growing economy, it is not the matter of fact that the big beat the small but
it is the fast beats the slow and the accurate beats the inaccurate. Below are
mentioned seven steps to reduce the fulfillment costs by improving customer
service at the same time. The following points are important with regard to
supply chains,

1. Integrate with order entry system: In today’s hyper competitive economy it

is very difficult to maintain order fulfillment through the internet. Most of them
placed through Internets are managed poorly and which end in resulting
distorting customer satisfaction due to delay in product delivery. Integrating a
systematic order fulfillment process tends to reduce manual labor that saves
time, increases profitabilityand customer satisfaction E.g. Order received in
night and make delivery in the day time.
2. Build in adaptability: Providing exceptional customer service has proved to
be challenging in today’s competitive environment. Companies can meet this
challenge by proving to be adaptable with the customer wants makes changes
in their orders right from the purchase and even up to and after shipment. This
can prove to be successful as the customers can get what they want even if
their product changes from the market. E.g. Tailor made transportation system
like packaging facility as per weather.
3. Confirm with bar codes: By changing the bar coding into an automated one
,the company can save a large amount of its time and energy and even
implement perfection in planning as it presents real time data instead of mere
projections. E.g. In the ware house material arranged with bar-code easy to
locate particular product with the bar-code system we can easily shift goods
as per priority of delivery and delivery places.
4. Conducting automated pickings: Automated technologies are easily fulfills
the needs of customer thereby increasing customer satisfaction and bringing
in repeated business in a shorter time span. E.g. Goods collection from

customer destination is one of good example of automated pickings it’s save
time and money of customers which bringing repeated business.
5. Automated shipping plans: Using automated shipping plan the workers can
pick to a predesigned way of stacking the containers without going for trial and
error methods. This saves a lot of time and energy of the workers engaged in
stacking the containers and speeding the delivery with less expense than
without automated shipping plan. E.g. Bar-code system on containers and on
the area of ware house which easily track the goods and easily stacking and
speeding the delivery.
6. Automate shipment verification: By applying automated verification
together with automated picking and using bar codes, more time can be saved
on packing, verifying and shipping process.
7. Sourcing orders based on facility workload: Logistic managers should use
the method of best utilize of space when multiple warehousing and distribution
facilities are available in order to improve responsiveness and maximize

The above factors tend to make the shipment reach the customers more
quickly and which therefore has a direct impact on their satisfaction levels.
The standards of service provided to end customers should be determined
and mentioned on top of the list. The remaining strategic decisions should
also be taken considering the customers interests. Organization has to
adjusting the supply chain as such to meet the market demand and product
features, Determining the relation model among the supply chain participants,
Selecting the suppliers, Determining on the distribution channels, Adopting a
specific method of stock holding, Determining the location and nature of the
warehouse, Formulating guidelines in selecting the transportation. Taking a
decision on any of the above mentioned factors without giving due
consideration to the customer needs may seriously affect the implementation
of the general strategies of the supply chain, as the strategies of the supply
chain are competitive in nature that aimed at end customer satisfaction.

The focus of supply chain on the customers can be studied more explicitly
using the Quick Response concept, which means identifying the demands and
reacting to its changes as quickly as possible. This concept was developed in
relation to textile industry in order to avoid losses due to change in demand.
The QR nature is such that it assume in close cooperation with the supply
chains by providing maximum satisfaction to its customers by reducing the
costs to its minimum. This becomes material if the customers provide timely
information to the suppliers regarding their demands and they make timely

supply of the demand. This method would no doubt increase sales by
reducing the costs by bringing in profit to all the supply chains involved.



Over the last few years, technology quickly has become so integrated into
daily life that it seems nearly impossible to imagine a normal workday without
some gadget or software to help make life a little easier.

Not only have ordinary citizens adopted tech to suit their needs and desires in
the form of smartphones, tablets, wearables and the various applications that
exist on these platforms, but entire enterprises and departments within
businesses also couldn’t function in the manner we’ve come to expect without

There are few areas of life where technology hasn’t made a large impact, and
that seems to suit the general public just fine.

Because of this close integration, technology in and around the supply chain is
a vital part of company operations.
Here are a few examples of the importance of technology to supply chain,
manufacturing and procurement services:

1. IT Leadership Meets Operations

As businesses across the world realize just how vital technology is to their
operations, new positions have been added to address the growing need for
expertise. However, some enterprises are opting to put refined knowledge on
the subject to use on supply chains, with chief information officers being
promoted to senior operations positions.
IT experts are not only ideal for this position because of their extensive
knowledge of existing systems, but they probably are more likely to think of
how they can leverage other technologies in the future.

2. Tech-Assisted Transparency
The best way for a supply chain to run smoothly is to have full transparency
across the board.
Suppliers and procurement services are more likely to fall into hot water if they
shroud their transactions in secrecy related to environmental or social
impacts. And these days, consumers have many questions about the origins
of their food, clothing, electronics, etc., and outright transparency would be
able to answer those questions with some swift moves of a finger on a
smartphone screen.

CoinDesk reported that developers, using technology inspired by BitCoin, are

working on an application that will be able to outline and address all questions
that someone may have about the supply chain of a given item.
The source noted that restaurants could list the ingredients in a dish and this
new applications would be able to tell the diner where the crops came from
and how they were grown. Not only is this transparent, but it gives consumers
a sense of control - an appealing concept for many discerning “foodies.”

3. Keeping a Competitive Edge

As far as the technological world is concerned, providing the public with the
newest software or feature is the most important key to the game. If a
company can beat out a competitor by getting the product out just a few
weeks before a competitor, it most likely will be seen as the front-runner and
an innovator, while the business that falls behind could be seen as a copycat.
The Register noted that Apple has been playing around with the idea of
a dual-lens for its camera that helps with depth-sensing technology. Currently,
there’s no patent for the sensor because there had been many issues and
holdups in the supply chain back in 2010.
Of course, Apple is not the only company implementing this sort of camera;
competitors such as HTC and Samsung are also looking into such tech.

As these examples demonstrate, technology is already important in and for

the supply chain - and it’s only going to get more integrated as time goes on.



Supply chain integration can be defined as a close calibration and collaboration

within a supply chain, mostly with the application of shared management

information systems. A supply chain is made from all parties that participate in

the completion of a purchase, like the resources, raw materials, manufacturing

of the product, shipping of completed products and facilitating services.

There are different levels of supply chain integration. We will understand this

with the help of an example of a computer manufacturing company. The initial

step in integration shall include choosing precise merchants to supply certain

inputs and ensuring compliance for them for supplying certain amount of

inputs within the year at a set cost.

This assures that the company has the appropriate materials required to

produce the expected output of computers during the year. In the meanwhile,

this computer company may sign a bond with a large supplier of circuit boards;

the bond expects it to deliver a precise quantity at precise times within a year

and fix a price that will be effective during the bond year.

If we move to a higher level, the next step would be to integrate the

companies more closely. The circuit board supplier may construct a plant close

to the assembly plant and may also share production software. Hence, the

circuit board company would be able to see how many boards are required in

the upcoming month and can construct them in time, as the company requires

them in order to meet its sales demand.

Further higher level is referred as vertical integration. This level starts when

the supply chain of a company is actually owned by the company itself. Here, a

computer company may buy the circuit board company just to ensure a

devoted supply of elements.

Push System
In a push-based supply chain, the goods are pushed with the help of a

medium, from the source point, e.g., the production site, to the retailer, e.g.,

the destination site. The production level is set in accordance with the previous

ordering patterns by the manufacturer.

A push-based supply chain is time consuming when it has to respond to

fluctuations in demand, which can result in overstocking or bottlenecks and

delays, unacceptable service levels and product obsolescence.

This system is based on the deliberation of customer’s demand. It tries to push

as many products into the market as possible. As a result, the production is

time consuming because the producer and the retailer struggle to react to the

changes in the market. Forecast or prediction plays an important role in the

push system.

Optimum level of products can be produced through long term prediction. This

deliberative nature of the push system leads to high production cost, high

inventory cost as well as high shipment cost due to the company’s desire to

halt products at every stage.

Thus, in the push view of supply chain integration, the manager of a firm may

sometimes fail to satisfy or cope with the fluctuating demand pattern. This

system leads to high inventory and high size of batches.

Here, the companies focus more on minimizing the cost of supply chain and

neglect the responsiveness. This system models challenges along with demand

management and transportation management.

Pull System
The pull-based supply chain is based on demand-driven techniques; the

procurement, production and distribution are demand-driven rather than

predicting. This system doesn’t always follow the make-to-order production.

For example, Toyota Motors Manufacturing produces products yet do not

religiously produce to order. They follow the supermarket model.

According to this model, limited inventory is kept and piled up as it is

consumed. Talking about Toyota, Kanban cards are used to hint at the

requirement of piling up inventory.

In this system, the demand is real and the company responds to the customer

demands. It assists the company in producing the exact amount of products

demanded by the clients.

The major drawback in this system is that in case the demand exceeds than

the amount of products manufactured, then the company fails to meet the

customer demand, which in turn leads to loss of opportunity cost.

Basically in the pull system, the total time allotted for manufacturing of

products is not sufficient. The production unit and distribution unit of the

company rely on the demand. From this point of view, we can say that the

company has a reactive supply chain.

Thus, it has less inventories as well as variability. It minimizes the lead time in

the complete process. The biggest drawback in pull based supply chain

integration is that it can’t minimize the price by ranking up the production and


Differences in Push and Pull System

The major differences between push and pull view in supply chain are as

follows −

 In the push system, the implementation begins in
anticipation of customer order whereas in the pull system,
the implementation starts as a result of customer’s order.

 In the push system, there is an uncertainty in demand

whereas in pull system, the demand remains certain.

 The push system is a speculative process whereas the pull

system is a reactive process.

 The level of complexity is high in the push system whereas

it is low in the pull system.

 The push based system concentrates on resources

allocation whereas the pull system stresses on

 The push system has a long lead time whereas the pull
system has a short lead time.

 The push system assists in supply chain planning whereas

the pull system facilitates in order completion.

To conclude, the push based supply chain integrations works with an objective

of minimizing the cost whereas the pull based supply chain integration works

with an objective to maximize the services it provides.

Push & PULL System
Mostly we find a supply chain as merger of both push and pull systems, where

the medium between the stages of the push-based and the pull-based systems

is referred as the push–pull boundary.

The terms push and pull were framed in logistics and supply chain

management, but these terms are broadly used in the field of marketing as

well as in the hotel distribution business.

To present an example, Wal-Mart implements the push vs. pull strategy. A

push and pull system in business represents the shipment of a product or

information between two subjects. Generally, the consumers use pull system

in the markets for the goods or information they demand for their

requirements whereas the merchants or suppliers use the push system

towards the consumers.

In supply chains, all the levels or stages function actively for the push and the

pull system. The production in push system depends on the demand predicted

and production in pull system depends on absolute or consumed demand.

The medium between these two levels is referred as the push–pull boundary or

decoupling point. Generally, this strategy is recommended for products where

uncertainty in demand is high. Further, economies of scale play a crucial role

in minimizing production and/or delivery costs.

For example, the furniture industries use the push and pull strategy. Here the

production unit uses the pull-based strategy because it is impossible to make

production decisions on the basis on long term prediction. Meanwhile, the

distribution unit needs to enjoy the benefits of economy of scale so that the

shipment cost can be reduced; thus it uses a push-based strategy.

Demand-Driven Strategies
The demand-driven strategies were first developed to understand the impact

of inactivity and collection, as information fertilizes the supply chain from the

source of demand to the suppliers.

Within a mentioned supply lead time, normally the manufacturers manufacture

sufficient goods to satisfy the needs of their clients predicted. But this is only

somewhat accurate at the granular level at which inventory decisions are


Anyways, when the actual demand varies from the demand predicted, the first

thing to be done is to adjust the supply levels needed in accordance with each

step of the supply chain. But because of time delay between changing

demands and its detection at several at points along the supply chain, its

impact is amplified, resulting in inventory shortages or excesses.

The inventory levels of the companies are disturbed because of the

overcompensation done by the companies either by slowing down or speeding

up production. These fluctuations prove to be a costly and inefficient affair for

all participants.

Basically, the demand-driven strategies or the demand-driven supply chain is

completely based on the demand as well as the supply part of marketing. So it

can be uniquely organized in terms of the demand side and supply side


The demand-side initiatives concentrate on efficient methods to acquire the

demand signal closer to the source, observe the demand to sense the latest

and most accurate demand signal and shape the demand by implementing and

following promotional and pricing strategies to gear up demand in accordance

with business objectives.

On the other hand, the supply side initiatives mostly need to do with reducing

reliance on the prediction by developing into an agile supply chain

accompanied by faster response when absolute demand is known.

All the strategies discussed above are addressed under the demand-driven

strategy, but we a company following all of them is rare. In fact, we can

conclude that companies concentrate on different markets on the basis of

features of the market and industry.


Supply Chain Management - Role of IT

Companies that opt to participate in supply chain management initiatives

accept a specific role to enact. They have a mutual feeling that they, along
with all other supply chain participants, will be better off because of this
collaborative effort. The fundamental issue here is power. The last two
decades have seen the shifting of power from manufacturers to retailers.

When we talk about information access for the supply chain, retailers have an
essential designation. They emerge to the position of prominence with the
help of technologies. The advancement of inter organizational information
system for the supply chain has three distinct benefits. These are −

 Cost reduction − The advancement of technology has further led to

ready availability of all the products with different offers and discounts.
This leads to reduction of costs of products.

 Productivity − The growth of information technology has improved

productivity because of inventions of new tools and software. That
makes productivity much easier and less time consuming.

 Improvement and product/market strategies − Recent years have

seen a huge growth in not only the technologies but the market itself.
New strategies are made to allure customers and new ideas are being
experimented for improving the product.

It would be appropriate to say that information technology is a vital organ of

supply chain management. With the advancement of technologies, new
products are being introduced within fraction of seconds increasing their
demand in the market. Let us study the role of information technology in
supply chain management briefly.

The software as well as the hardware part needs to be considered in the

advancement and maintenance of supply chain information systems. The
hardware part comprises computer's input/output devices like the screen,
printer, mouse and storage media. The software part comprises the entire

system and application program used for processing transactions
management control, decision-making and strategic planning.

Here we will be discussing the role of some critical hardware and software
devices in SCM. These are briefed below −
Electronic Commerce

Electronic commerce involves the broad range of tools and techniques used
to conduct business in a paperless environment. Hence it comprises
electronic data interchange, e-mail, electronic fund transfers, electronic
publishing, image processing, electronic bulletin boards, shared databases
and magnetic/optical data capture.

Electronic commerce helps enterprises to automate the process of

transferring records, documents, data and information electronically between
suppliers and customers, thus making the communication process a lot
easier, cheaper and less time consuming.
Electronic Data Interchange

Electronic Data Interchange (EDI) involves the swapping of business

documents in a standard format from computer-to-computer. It presents the
capability as well as the practice of exchanging information between two
companies electronically rather than the traditional form of mail, courier, &

The major advantages of EDI are as follows −

 Instant processing of information

 Improvised customer service

 Limited paper work

 High productivity

 Advanced tracing and expediting

 Cost efficiency

 Competitive benefit

 Advanced billing

The application of EDI supply chain partners can overcome the deformity and
falsehood in supply and demand information by remodeling technologies to
support real time sharing of actual demand and supply information.
Barcode Scanning

We can see the application of barcode scanners in the checkout counters of

super market. This code states the name of product along with its
manufacturer. Some other practical applications of barcode scanners are
tracking the moving items like elements in PC assembly operations and
automobiles in assembly plants.

Data Warehouse

Data warehouse can be defined as a store comprising all the databases. It is

a centralized database that is prolonged independently from the production
system database of a company.

Many companies maintain multiple databases. Instead of some particular

business processes, it is established around informational subjects. The data
present in data warehouses is time dependent and easily accessible.
Historical data may also be accumulated in data warehouse.
Enterprise Resource Planning(ERP) Tools

The ERP system has now become the base of many IT infrastructures. Some
of the ERP tools are Baan, SAP, PeopleSoft. ERP system has now become
the processing tool of many companies. They grab the data and minimize the
manual activities and tasks related to processing financial, inventory and
customer order information.

ERP system holds a high level of integration that is achieved through the
proper application of a single data model, improving mutual understanding of
what the shared data represents and constructing a set of rules for accessing

With the advancement of technology, we can say that world is shrinking day
by day. Similarly, customers' expectations are increasing. Also companies
are being more prone to uncertain environment. In this running market, a
company can only sustain if it accepts the fact that their conventional supply
chain integration needs to be expanded beyond their peripheries.

The strategic and technological interventions in supply chain have a huge

effect in predicting the buy and sell features of a company. A company should
try to use the potential of the internet to the maximum level through clear
vision, strong planning and technical insight. This is essential for better
supply chain management and also for improved competitiveness.

We can see how Internet technology, World Wide Web, electronic commerce
etc. has changed the way in which a company does business. These
companies must acknowledge the power of technology to work together with
their business partners.

We can in fact say that IT has launched a new breed of SCM application. The
Internet and other networking links learn from the performance in the past
and observe the historical trends in order to identify how much product should
be made along with the best and cost effective methods for warehousing it or
shipping it to retailer.

 Inventory Management in SCM

As seen under the major objectives of supply chain, one of the basic
objectives of SCM is to make sure that all the activities and functions within
as well as across the company are managed efficiently.

There are instances where efficiency in supply chain can be ensured by

efficiencies in inventory, to be more precise, by maintaining efficiency in
inventory reductions. Though inventory is considered a liability to efficient
supply chain management, supply chain managers acknowledge the need of
inventory. However, the unwritten rule is to keep inventory at a bare

Many strategies are developed with the objective of streamlining inventories
beyond the supply chain and holding the inventory investment as low as
possible. The supply chain managers tend to maintain the inventories as low
as possible because of inventory investment. The cost or investment related
with owning inventories can be high. These costs comprise the cash outlay
that is necessary for purchasing the inventory, the costs of acquiring the
inventories (the cost of having invested in inventories rather than investing in
something else) and the costs related with managing the inventory.
Role of Inventory

Before understanding the role of inventory in supply chain, we need to

understand the cordial relationship between the manufacturer and the client.
Handling clients, coping up with their demands and creating relationships with
manufacturer is a critical section of managing supply chains.

There are many instances where we see the concept of collaborative

relationship being marked as the essence of supply chain management.
However, a deeper analysis of supply chain relationships, especially those
including product flows, exposes that at the heart of these relationships is
inventory movement and storage.

More than half of it relies on the purchase, transfer or management of

inventory. As we know, inventory plays a very important role in supply chains,
being a salient feature.

The most fundamental functions that inventory has in supply chains are as
follows −

 To supply and support the balance of demand and supply.

 To effectively cope with the forward and reverse flows in the supply

Companies need to manage the upstream supplier exchanges and

downstream customer demands. In this situation, the company enters a state
where it has to maintain a balance between fulfilling the demands of
customers, which is mostly very difficult to predict with precision or accuracy,
and maintaining adequate supply of materials and goods. This balance can
be obtained through inventory.
Optimization Models

Optimization models of supply chain are those models that codify the
practical or real life issues into mathematical model. The main objective to
construct this mathematical model is to maximize or minimize an objective
function. In addition to this, some constraints are added to these issues for
defining the feasible region. We try to generate an efficient algorithm that will
examine all possible solutions and return the best solution in the end. Various
supply chain optimization models are as follows −
Mixed Integer Linear Programming

The Mixed integer linear programming (MILP) is a mathematical modeling

approach used to get the best outcome of a system with some restrictions.
This model is broadly used in many optimization areas such as production
planning, transportation, network design, etc.

MILP comprises a linear objective function along with some limitation

constraints constructed by continuous and integer variables. The main

objective of this model is to get an optimal solution of the objective function.
This may be the maximum or minimum value but it should be achieved
without violating any of the constraints imposed.

We can say that MILP is a special case of linear programming that uses
binary variables. When compared with normal linear programming models,
they are slightly tough to solve. Basically the MILP models are solved by
commercial and noncommercial solvers, for example: Fico Xpress or SCIP.
Stochastic Modeling

Stochastic modeling is a mathematical approach of representing data or

predicting outcomes in situations where there is randomness or
unpredictability to some extent.

For example, in a production unit, the manufacturing process generally has

some unknown parameters like quality of the input materials, reliability of the
machines and competence within the employees. These parameters have an
impact on the outcome of the manufacturing process but it is impossible to
measure them with absolute values.

In these types of cases, where we need to find absolute value for unknown
parameters, which cannot be measured exactly, we use Stochastic modeling
approach. This modeling strategy helps in predicting the result of this process
with some defined error rate by considering the unpredictability of these

Uncertainty Modeling

While using a realistic modeling approach, the system has to take

uncertainties into account. The uncertainty is evaluated to a level where the
uncertain characteristics of the system are modeled with probabilistic nature.

We use uncertainty modeling for characterizing the uncertain parameters with

probability distributions. It takes dependencies into account easily as input
just like Markov chain or may use the queuing theory for modeling the
systems where waiting has an essential role. These are common ways of
modeling uncertainty.
Bi-level Optimization

A bi-level issue arises in real life situations whenever a decentralized or

hierarchical decision needs to be made. In these types of situations, multiple
parties make decisions one after the other, which influences their respective

Till now, the only solution to solve bi-level problems is through heuristic
methods for realistic sizes. However, attempts are being made for improving
these optimal methods to compute an optimal solution for real problems as

What is inventory management?

Inventory management is the act of keeping track of a company’s stocked
goods and monitoring their weight, dimensions, amounts, and location. The
goal of inventory management is to minimize the cost of holding inventory by
helping business owners know when it’s time to replenish products, or buy
more materials to manufacture them.
Why inventory management is important

Effective inventory management is essential for ensuring a business has

enough stock on hand to meet customer demand. If inventory management is
not handled properly it can result in a business either losing money on
potential sales that can’t be filled, or wasting money by stocking too much
inventory. An inventory management system can also help you prevent a
number of other mistakes:

Inventory management saves you money

1. Avoid spoilage

If you’re selling a product that has an expiry date, like food or makeup, there’s
a very real chance it will go bad if you don’t sell it in time. Solid inventory
management helps you avoid unnecessary spoilage.

2. Avoid dead stock

Dead stock is stock that can no longer be sold, but not necessarily because it
expired—it could have gone out of season, out of style, or otherwise become
irrelevant. By managing your inventory better, you can avoid dead stock.

3. Save on storage costs

Warehousing is often a variable cost, meaning it fluctuates based on how

much product you’re storing. When you store too much product at once or end
up with a product that’s difficult to sell, your storage costs will go up. Avoiding
this will save you money.

Inventory management improves cash flow

Not only is good inventory management more cost-efficient, it improves cash

flow in other ways, too. Remember, inventory is product that you’ve likely
already paid for with cash (checks and electronic transfers included) and
you’re going to sell it for cash, but while it’s sitting in your warehouse it’s
definitely not cash. Try paying your landlord in dog collars or iPhone cases.

This is why it’s important to factor inventory into your cash flow management.
Inventory directly affects sales (by dictating how much you can sell) and
expenses (by dictating what you have to buy), and both of these elements
factor heavily into how much cash you have on hand. In short, better inventory
management leads to better cash flow management.

When you have a solid inventory system you’ll know exactly how much
product you have, and based on sales you can project when you’ll run out and
make sure you replace it on time. Not only does this help ensure you don’t
lose sales (critical for cash flow), but it also lets you plan ahead for buying
more so you can ensure you have enough cash set aside.

Money spent on inventory is money that is not spent on growth. Manage it


8 essential inventory management techniques

Inventory management is a highly customizable part of doing business. The

optimal system is different for each company.

However, every business should strive to remove human error from inventory
management as much as possible, which means taking of advantage
inventory management software. If you run your business with Shopify,
inventory management is already built in.

Regardless of the system you use, the following eight techniques to will help
you improve your inventory management—and cash flow.

1. Set par levels

Make inventory management easier by setting “par levels” for each of your
products. Par levels are the minimum amount of product that must be on hand
at all times. When your inventory stock dips below the predetermined levels,
you know it’s time to order more.

Ideally, you’ll typically order the minimum quantity that will get you back above
par. Par levels vary by product and are based on how quickly the item sells
and how long it takes to get back in stock. Although setting par levels requires
some research and decision-making up front, having them set will systemize
the process of ordering. Not only will it make it easier for you to make
decisions quickly, it will allow your staff to make decisions on your behalf.

Remember that conditions change over time. Check on par levels a few times
throughout the year to confirm they still make sense. If something changes in
the meantime, don’t be afraid to adjust your par levels up or down.

2. First-In First-Out (FIFO)

“First-in, first-out” is an important principle of inventory management. It means

your oldest stock (first-in) gets sold first (first-out), not your newest stock. This
is especially important for perishable products so you don’t end up with
unsellable spoilage.

It’s also a good idea to practice FIFO for non-perishable products. If the same
boxes are always sitting at the back, they’re more likely to get worn out. Plus,
packaging design and features often change over time. You don’t want to end
up with something obsolete that you can’t sell.

In order to manage a FIFO system, you’ll need an organized warehouse. This

typically means adding new products from the back, or otherwise making sure
old product stays at the front. If you’re working with a warehousing and
fulfillment company they probably do this already, but it's a good idea to call
them to confirm.

3. Manage relationships

Part of successful inventory management is being able to adapt quickly.

Whether you need to return a slow selling item to make room for a new
product, restock a fast seller very quickly, troubleshoot manufacturing issues,
or temporarily expand your storage space, it’s important to have a strong
relationship with your suppliers. That way they’ll be more willing to work with
you to solve problems.

In particular, having a good relationship with your product suppliers goes a

long way. Minimum order quantities are often negotiable. Don’t be afraid to
ask for a lower minimum so you don’t have to carry as much inventory.

A good relationship isn’t just about being friendly. It’s about clear, proactive
communication. Let your supplier know when you’re expecting an increase in
sales so they can adjust production. Have them let you know when a product
is running behind schedule so you can pause promotions or look for a
temporary substitute.

4. Contingency planning

A lot of issues can pop up related to inventory management. These types of

problems can cripple unprepared businesses. For example:

 Your sales spike unexpectedly and you oversell your stock

 You run into a cash flow shortfall and can't pay for product you desperately
 Your warehouse doesn’t have enough room to accommodate your seasonal
spike in sales
 A miscalculation in inventory means you have less product than you thought
 A slow moving product takes up all your storage space
 Your manufacturer runs out of your product and you have orders to fill
 Your manufacturer discontinues your product without warning
It’s not a matter of if problems arise, but when. Figure out where your risks
are and prepare a contingency plan. How will you react? What steps will you
take to solve the problem? How will this impact other parts of your business?
Remember that solid relationships go a long way here.

5. Regular auditing

Regular reconciliation is vital. In most cases, you’ll be relying on software and

reports from your warehouse to know how much product you have stock.
However, it’s important to make sure the facts match up. There are several
methods for doing this.

Physical inventory

A physical inventory is the practice is counting all your inventory at once.

Many businesses do this at their year-end because it ties in with accounting
and filing income tax. Although physical inventories are typically only done
once a year, it can be incredibly disruptive to the business, and believe me,
it’s tedious. If you do find a discrepancy, it can be difficult to pinpoint the issue
when you’re looking back at an entire year.

Spot checking

If you do a full physical inventory at the end of the year and you often run into
problems, or you have a lot of products, you may want to start spot checking
throughout the year. This simply means choosing a product, counting it, and
comparing the number to what it's supposed to be. This isn’t done on a
schedule and is supplemental to physical inventory. In particular, you may
want to spot check problematic or fast-moving products.

Cycle counting

Instead of doing a full physical inventory, some businesses use cycle counting
to audit their inventory. Rather than a full count at year-end, cycle counting
spreads reconciliation throughout the year. Each day, week, or month a
different product is checked on a rotating schedule. There are different
methods of determining which items to count when, but, generally speaking,
higher-value items will be counted more frequently.

6. Prioritize with ABC

Certain products need more attention than others. Using an ABC analysis lets
you prioritize your inventory management by separating out products that
require a lot of attention from those that don’t. Do this by going through your
product list and adding each product to one of three categories:

1. High-value products with a low frequency of sales

2. Moderate value products with a moderate frequency of sales
3. Low-value products with a high frequency of sales
Items in category A require regular attention because their financial impact is
significant but sales are unpredictable. Items in category C require less
oversight because they have a smaller financial impact and they're constantly
turning over. Items in category B fall somewhere in-between.

7. Accurate forecasting

A huge part of good inventory management comes down to accurately

predicting demand. Make no mistake, this is incredibly hard to do. There are
countless variables involved and you’ll never know for sure exactly what’s
coming—but you can try to get close. Here are a few things to look at when
projecting your future sales:

 Trends in the market

 Last year’s sales during the same week
 This year's growth rate
 Guaranteed sales from contracts and subscriptions
 Seasonality and the overall economy
 Upcoming promotions
 Planned ad spend
If there's something else that will help you create a more accurate forecast, be
sure to include it.

8. Consider dropshipping

Dropshipping is almost an ideal scenario from an inventory management

perspective. Instead of having to carry inventory and ship products yourself—
whether internally or through third-party logistics—the manufacturer or
wholesaler takes care of it for you. Basically, you completely remove inventory
management from your business.

Many wholesalers and manufacturers advertise dropshipping as a service, but

even if your supplier doesn’t, it may still be an option. Don’t be afraid to ask.
Although products often cost more this way than they do in bulk orders, you
don't have to worry about expenses related to holding inventory, storage, and
fulfillment. You can test out dropshipping today, with Oberlo, for free.
Take control of your inventory

Remember that with an effective inventory management system in place, you

can help reduce costs, keep your business profitable, analyze sales patterns
and predict future sales, and prepare the business for the unexpected. With
proper inventory management system in place, a business has a better
chance for profitability and survival.

It’s time to take control of your inventory management and stop losing money.
Choose the right inventory management techniques for your business, and
start implementing them today.


Strategic sourcing can be defined as a collective and organized
approach to supply chain management that defines the way information is
gathered and used so that an organization can leverage its consolidated
purchasing power to find the best possible values in the marketplace.

We cannot build up the significance of operating in a collaborative manner.

Several decades have witnessed a major transformation in the profession of
supply chain, from the purchasing agent comprehension, where staying in
repository was the criterion, to emerging into a supply chain management
surrounding, where working with cross functional and cross location teams is
important, to achieve success.

Strategic sourcing is organized because of the necessity of some

methodology or process. It is collective because one of the most essential

necessities for any successful strategic sourcing attempt is of receiving
operational components, apart from the procurement, engaged in the
decision-making and assessment process.

The process of strategic processing is a step by step approach. There are

seven distinct steps engaged in the process of strategic processing. These
steps are explained below in brief.
Understanding the Spend Category

The first three steps involved in the strategic sourcing are carried out by the
sourcing team. In this first stage, the team needs to do a complete survey on
the total expenditure. The team ensures that it acknowledges every aspect
regarding the spend category itself.

The five major regions that are analyzed in the first stage are as follows −

 Complete previous expenditure records and volumes.

 Expenditures divided by items and sub items.

 Expenditures by division, department or user.

 Expenditures by the supplier.

 Future demand projections or budgets.

For example, if the classification is grooved packaging at a customer goods

company, the team has to acknowledge the description of the classification,
application patterns and the reason behind specification of particular types
and grades specified.

Stakeholders at all functioning units and physical locations are to be
determined. The logistics, for instance, needs an updated report regarding
the transportation specifications and marketing requirements to acknowledge
some quality or environmentally applicable features.
Supplier Market Assessment

The second step includes frequent assessment of the supplier market for
pursuing substitute suppliers to present incumbents. A thorough study of the
supplier marketplace dynamics and current trends is done. The major
element of the key products design is should-cost. Along with it, an analysis
on the major suppliers’ sub-tier marketplace and examination for any risks or
new opportunities are also important.

Now, it is not recommended to analyze the should-cost for every item. There
are many instances where conservative strategic sourcing techniques tend to
work better. But in the instances where the application of strategic sourcing is
not applicable, the should-cost analysis supplies a valuable tool that drives
minimizing of cost and regular progress efforts of the supplier.
Supplier Survey

The third step is developing a supplier analysis for both incumbent and
potential substitute suppliers. This analysis assists in examining the skills and
abilities of a supplier. In the meanwhile, data collected from incumbent
suppliers is used for verifying spend information that suppliers have from their
sales systems.

The survey team considers the above-mentioned areas for gathering
information. The areas are as follows −

 Feasibility

 Capability

 Maturity

 Capacity

The analysis is done to examine the potential and skills of the market to
satisfy the customer demands. This analysis helps in the examination done at
the initial stage to find out if the proposed project is feasible and can be
delivered by the identified supply base.

This analysis also supplies an initial caution of the customer demands to the
market and enables suppliers to think about how they would react to and fulfill
the demand. Here the motto is to motivate the appropriate suppliers with the
right structural layout to respond to the demands.
Building the Strategy

The fourth step comprises constructing the sourcing strategy. The merger of
the first three steps supports the necessary elements for the sourcing
strategy. For every region or category, the strategy depends on answering
the questions given below.

 How willing is the marketplace to oppose the supplier?

 How supportive are the clients of a firm for testing incumbent supplier

 What are the substitutes to the competitive assessment?

Generally, these substitutes are opted when a purchasing firm has little
leverage over its supply base. They will depend on the belief that the
suppliers will share the profits of a new strategy. Thus, we say that the
sourcing strategy is an accumulation of all the drivers thus far mentioned.
RFx Request

Mostly, the competitive approach is applied in general cases. In this

approach, a request for proposal or bid needs to be prepared (e.g., RFP,
RFQ, eRFQ, ITT) for most spend classifications or groups.

This defines and clarifies all the needs for all prequalified suppliers. The
request should comprise product or service specifications, delivery and
service requirements, assessment criteria, pricing structure and financial
terms and conditions.

In the fifth stage, an interaction plan needs to be executed to allure maximum

supplier interest. It must be ensured that each and every supplier is aware
that they are competing on a level playing field. After sending the RFP to all
suppliers, it is to be confirmed that they are given enough time to respond. In
order to motivate greater response, follow-up messages should also be sent.

This step is all about selecting and negotiating with suppliers. The sourcing
team is advised to apply its assessment constraints to the responses
generated by the suppliers.

If information across the limitation of RFP response is required, it can be
simply asked for. If done correctly, the settlement process is conducted first
with a larger set of suppliers and then shortlisted to a few finalists. If the
sourcing team utilizes an electronic negotiation tool, large number of
suppliers can sustain in the process for longer duration, giving more wide
suppliers a better opportunity at winning the enterprise.
Communicaction With New Suppliers

After informing the winning supplier(s), they should be invited to take part in
executing recommendations. The execution plans vary according to the scale
of switches the supplier makes.

For obligatory purposes, a communication plan will be set up, including any
modification in specifications and improvements in delivery, service or pricing
models. These tend to be communicated to users as well.

As we know, the company gains immensely from this entire process of

creating a communication plan, making some modifications according to the
customer demand and further forwarding this to the customer. It’s essential
that this process should be acknowledged by both the company and the

For new suppliers, we need to construct a communication plan that copes

with the alteration from old to new at every point in the process engaged by
the spend category. The sections that have an impact of this change are the
department, finance and customer service.

In addition, the risk antennae will be particularly sensitive during this period. It
is essential to gauge closely the new supplier’s performance during the first
weeks of performance.

Another essential task is to grasp the intellectual capital of the sourcing team,
which has been developed within the seven-step process, so that it can be
used the next time that category is sourced.


Logistics - An Integral Component of Supply Chain

Supply Chain Management encompasses, planning, design, control and
implementation of all business processes related to procurement,
manufacturing, distribution and sales order fulfillment functions of a

All these activities involve multiple networks of vendors and service providers
which are integrated and co-coordinated by the Supply Chain Experts of the
organization to move raw materials and finished goods from and to all distant
locations across the globe.

Logistics is the backbone on which Supply Chains are driven. Logistics refers
to the management of the flow of goods and supplies involving information,
data and documentation between two entities or points. Logistics plays
important role in post procurement function of delivery of raw material from the
supplier to the point of production and Finished Goods Supply chain
management from the point of dispatch from factory to the point of delivery to
the customer.

The flow of goods flows through a network of transportation by road, rail, air or
ship and intermediary warehouses to hold inventories before moving to the

forward locations. The entire activity involves multi-tier suppliers, agents, and
agencies including freight forwarders, packers, customs department,
distributors and Logistics service providers, etc.

Logistics therefore is an integral component of Supply Chain


Origin of Logistics as a recognized discipline is attributed to military and

defense organizations. Defense departments make use of detailed and
extensive planning to gather supplies and move men and materials to various
locations and bases. The success of any military exercise depends upon the
ability of the establishment to be able to gather information, analyze,
assimilate and take appropriate logistical measures to support their units

Similarly in any business organization, the successful operations depend upon

visibility and control over the logistics process managed through and with
excellent logistics service provider backbone and network.

In many cases Supply chain is often referred to as Logistics and vice e

versa. Though logistics and supply chain are intricately linked, both do not
mean the same. Logistics is a sub-component and extension of Supply Chain.

Supply chain design in an organization would detail, plan and strategize the
procurement strategy, manufacturing location selection, design and develop
distribution network and strategy for finished goods, etc. While logistics
planning would deal with the details of procurement logistics, finished goods
distribution, sales order fulfillment, and inventory management, etc. Logistics
planning drives the strategic direction and framework for its design planning
from SCM Strategy.

Take the case of production procurement, SCM strategy will define the
process, selection of vendors, procurement strategy and the mode of order
fulfillment coupled with cycle time and lead time to supply to the production
floor. Logistics in this case details out the mode of transportation from the
vendor, the consignment planning, process for order trigger, consolidation of

shipments, detailing transportation modes and vendors, defines transit times,
documentation process and implements the plan, controls and monitors the
flow of goods from point of origin up to the point of delivery to the plant for

In the case of Finished Goods distribution, SCM strategy will define overall
network design for stock holding and other channels of distribution. Logistics
deals with the entire gamut of designing transportation network, partnering
with 3rd party logistics providers to establish distribution centers and
warehouses, planning inventory management and operations process
including packing, promotional bundling, etc., primary, secondary distribution
network and vendors and at the end the complete documentation and
information process for the entire chain of activities.


The 6 Core Purchasing

Companies implement Purchasing strategies in order to make cost effective
purchasing decisions from a group of efficient vendors who will deliver quality
goods on time and at mutually agreeable terms.
These purchasing strategies may include such choices as
making procurement savings by using centralized purchasing which is
concentrating the entire procurement activities within one principal location.

Other companies may decide to undertake a single source procurement

strategy that involves obtaining excellent dedicated service from a single
vendor. These strategies are predominant when sourcing for IT or indirect
purchasing such as office supplies and cleaning.

Other companies may use a procurement strategy of using a

core purchasing cycle. This is where they order from a group of regular

vendors and use outsourcing procurement for their larger and ad hoc

Still others, particularly when they are seeking labor for short-term projects will
use procurement auctions in order to obtain the best pricing levels.

Regardless of the size of the company, there is a core group of purchasing

strategies that most of them implement. These are:

 Supplier Optimization

The company chooses an optimum mix of vendors who can provide the best
prices and terms. This process usually means that the less able suppliers
who cannot provide a quality service at the terms and prices required are
discarded. This is by far the most common of the various purchasing


Total Quality Methods, requires the vendors to provide an ever increasing

quality service with zero errors. The supplier ensures purchasing best
practices using a number of tools such as six sigma.

 Risk Management

As more companies obtain their supplies from countries such as China and
India, they are more concerned with the risk management of this supply chain.
Whilst these countries can supply products at very advantageous prices,
these advantages can be soon negated by a natural or human disaster.

 Global Sourcing

Large multinational companies see the world as one large market and source
from many vendors, regardless of their country of origin.

 Vendor Development

Some companies believe that they are working hand-in-hand with their
vendors. They therefore spend some time in developing processes that assist
these vendors. There may also be the situation where a company is
dependent upon just one supplier for their products. If this supplier is unable
to perform to the required standards, the purchaser may assist the vendor in
improving their service or implement processes to improve their procurement

 Green Purchasing

This is one of the more common purchasing strategies for governments and
local governments. This strategy champions the need for recycling and
purchasing products that have a negative impact on the environment.

A company will choose purchasing strategies that promote their procurement

best practices of minimizing costs, maximizing quality and ensuring that
quality products are delivered on time.

What is the Transportation Supply Chain?

Transportation refers to the movement of product from one location to another
as it makes its way from the beginning of a supply chain to the customer’s
handle. This requires a new broad look at the business of transportation
supply chain, including supply chain management, logistics, &
procurement. Freight transportation costs in the United States amount to
about 6% of the GDP, which means that a large portion of a company’s supply
chain costs come from transportation. As we’ve stated in blogs posts
about understanding how transportation costs fit into the business, the more
you think more holistically as a logistics or transportation manager about the
role of transportation in the overall supply chain and business, and less about
the tactics of transportation (technology now is the business process
enablement tool), you can strategically work with other players in the supply
chain in order to more effectively reach the corporate and business vision your
organization has set out to reach.

Many manufacturers & retailers have found that they can use state of the art
supply chain management to reduce inventory & warehousing costs while
speeding up delivery to the end customer.

Any supply chain’s success is closely linked to the appropriate use of

transportation. Walmart has effectively used a responsive transportation
system to lower its overall costs. At distribution centers, Walmart uses cross-

docking, a process in which product is exchanged between trucks so that
each truck going to a retail store has products from different suppliers.

Managers should ensure that a firm’s transportation strategy supports its

competitive strategy. Firms should evaluate the transportation function based
on a combination of transportation costs, other costs such as inventory
affected by transportation decisions, & the level of responsiveness achieved
with customers.

Managers should consider an appropriate combination of company-owned &

outsourced transportation to meet their needs.

The Adverse Affect of Not Understanding the Transportation Supply

Chain’s Role

When freight costs are high, even seemingly small oversights can result in
unneeded expenses that could have been avoided and thus cut into overall
profit margins. Product write-offs can occur when sales channels are
oversupplied. Undersupplied sales channels can also have negative results in
the form of missed sale opportunities. Failure to monitor raw material prices
can also result in above average costs across multiple sources. In addition to
this, and probably more detrimental to budgeting, is the hidden cost of
transportation in a poor supply chain. When getting goods from one point to
another is a crucial aspect of business, then ensuring that this process is most
efficient becomes a huge economic concern.

This is especially true in large enterprises and the obvious connection

between visibility of freight and the transportation economics become easy to
see. Even in smaller businesses where the margins are rather low,
transportation costs are still a crucial element of creating profitability.

The Transportation Supply Chain is Driven By Properly Integrated

Technology Systems

Most businesses would identify transportation supply chain visibility as a

primary goal, however, it is sometimes used little more than a marketing term
that gets used to simply impress those invested in the company. This is
especially true in larger enterprises. That is because many enterprises have
never really figured out ways to implement real transportation and supply
chain visibility. One of the reasons that transportation supply chain visibility

does not get the attention it deserves is because as a process, supply chain
visibility requires true system integration operating between many elements.
Some of these elements have different master data that must be used. This
data must be not only present, but also running in harmony over all systems.
These can include warehouse management systems, multiple ERPs, ordering
systems, and transportation management systems.

When these sources are made up across many geographies, special attention
is required in order to keep them all cohesively glued together. The glue is
getting the materials from starting point to destination. The goal is to get this
done efficiently and cost effectively. Without transportation supply
chain visibility there will be time delays, expenses, and even backlogs. These
events can throw off production schedules even creating idle labor or eventual
lost sales. So, as the costs add up, you can see the importance of focusing on
understanding transportation’s role in the supply chain.

The Delicate Balance of Transportation Supply Chain Management

Usually supply chain management simply becomes a balancing act of time

versus cost. This is seen most easily in the transportation element. There are
many ways available to ship goods from one place to another, but with
foresight, the cost of shipping can be balanced through different practices and
compared against relative shipping times. When manufacturers plan ahead to
make sure the materials are arriving in the most time efficient way, they can
then achieve the lowest freight costs.

Many like to think of an enterprise supply chain as a living thing. Living things
are always changing. Some suppliers like to challenge incumbents with what
seems to be better prices or services, raw materials may fluctuate in price, or
foreign exchange rates could change. Any of these changes can affect the
transportation supply chain as well. This basically means that the supply chain
is not static, and if the supply chain is not static then the distribution
requirements are not static either and will change. Transportation systems
must change in response and it’s up to the shipper putting in place systems
either in-house or through a transportation management 3PL who can supply
that expertise immediately to be prepared for the constant of change.

Many problems in transportation supply chain can be addressed through the

availability of analytics provided through a transportation management
system. Needing such insights to allow companies to make smarter business

decisions is especially true when supply chains become larger and begin
operating on a larger scale. Recent advancements in technology also help
promise a better integration between physical product movement and visibility.
One good example is the surge of interconnected devices to connect pallets,
trailers and containers systems in order to provide greater visibility. Of course,
proper implementation is essential in order for these great technologies to

Companies of all sizes must approach the transportation supply chain by

implementing more harmonious systems in order to achieve greater visibility
and a lower occurrence of supply chain errors. In the end this will result in
lower total costs for the organization even beyond transportation costs.

Well executed transportation management system always lead to the greatest

supply chain visibility. When transportation systems feed into a predictive
analytics scheme performance will be improved across the board. In fact once
the inventory is loaded into a channel it is the predictive analytics
responsibility to plan for efficient transportation.

Supply chain management ultimately has many moving parts, the starting
point must always be transportation, however, as it is anywhere from 40 to
60% of your supply chain costs. .


Introduction to Logistics and

Supply Chain Management

The term “Supply Chain Management” was coined in 1982 by Keith Oliver of
Booz, Allen and Hamilton Inc. But the discipline and practice has been in
existence for centuries.

The terms Logistics and Supply Chain Management are used interchangeably
these days, but there is a subtle difference that exists between the two.

‘Logistics’ has a military origin, and used to be associated with the movement
of troops and their supplies in the battlefield. But like so many other
technologies and terminologies, it entered into the business lexicon gradually
and has now become synonymous with the set of activities ranging from
procurement of raw materials, to the delivery of the final polished good to the
end consumer.

In a typical business scenario, many organizations work in tandem (knowingly

or unknowingly) to get the final product in hand of the end consumer. The
supply chain is a network of these organizations that coalesce with each other
(downstream or upstream) to make the final shipment successful.

A group of farmers, a cotton mill, a designer and a tailor is the least number of
stakeholders you can expect from a regular shirt you wear every day.

Introduction to Logistics and Supply Chain Management (SCM)

Logistics is generally seen as a differentiator in terms of the final bottom line of

a typical “hard and tangible goods” organization; enabling either a lower cost
or providing higher value.

While a lower cost is mostly a one-time feel good factor and has been the
traditional focus area in logistics, high value comes into the picture much later
and may be tangible or intangible in a good’s initial stages.

So while an organization like Zappos may look costly at a first glance, the
extraordinary customer service due to robust policies is a value which more
than offsets the slightly higher cost.
Logistics is concerned with both materials flow and information flow. While the
materials flow from the supplier to consumer, the information flows the other
way round. It is not only concerned with inventory and resource utilization,
customer response also falls under the ambit of logistics.

In simple terms, logistics can be seen as a link between the manufacturing

and marketing operations of a company. The traditional organizations used to
think of them separately, but there is a definite value addition in integrating the
two due to the interdependence and feedback channel between the two.

The level of coordination required to minimize the overall cost for the end
consumer gets tougher to achieve as the number of participants in a supply
chain increase, as an extremely efficient flow of material and information is
required for optimization.

Logistics cover the following broad functional areas: network design,

transportationand inventory management.
Manufacturing plants, warehouses, stores etc. are all facilities which form key
components in the network design. Transportation: the cost and consistency
(reliability) required out of the transportation network determines the type and
mode of the movement of goods and also affects the inventory.

Buffer (or safety) stock is the reserve stock held to safeguard against
shortages or unexpected surge in demand, to avoid “stock-outs”. Fewer
inventories with negligible stock-outs — the hallmark of an efficient logistical

Basic concepts of Logistics and SCM

Inventory Planning
Organizations want to minimize the inventory levels due to its almost linear
relationship with the cost. Yet if the demand is forecasted accurately, there
would ideally be no need for inventory and the goods will move seamlessly
from warehouses to customers.

o That would have been awesome, but it is deep into the ideal world zone. In
the real world, the forecasted numbers can only take you so far and some
inventory has to be maintained to satiate any surges in demand; the cost of
unhappy consumers who are not serviced is often huge, and is immeasurable
in most cases.

o Yet overstocks lead to increase in working capital requirements, insurance

costs and blocked resources which could have been productive someplace

o Making a business forecast has largely been a gut-based process, but is
changing rapidly in the era of data-based decision making. The forecast
depends on the historical baseline for sales, seasonality (soft drinks have
higher sales volume in May), recent trends (Samsung is losing out to
competitors when it comes to phones, a declining trend), business cycles
(economies go through expansion and contraction every few years),
promotional offers (up to 50% off can drive the average fashionista mad) etc.

The kind of transportation employed by an organization is a strategic decision
(it usually accounts for around 1/3rd of the total logistics cost) based on the
required level of risk exposure, customer service profiles, geographic area
covered etc. Truck shipments take more time for delivery compared to air
transport (customers with relaxed turnaround times); is cheaper but
necessitates maintenance of higher inventory levels.

o Transportation serves the purpose of not just product movement, but

storage as well (not very intuitive). Time spent for delivery means saved time
for warehousing, and many times the cost to offload and reload shipments can
be greater than the cost of letting the goods stay in the transportation vehicles

o Two basic thumb rules apply for transportation decisions: truck load (TL)
shipments are better than less-than-truckload (LTL) shipments as storage
space is a perishable commodity (just like a commercial airline does not want
to fly with empty seats), and the cost per kilometer decreases as the distance
increases (two 500 km shipments is usually more expensive than a single
1000 km shipment).

o The factors which determine the economies of transportation decisions

include but are not limited to: distance between the starting and destination
points, and density (higher density products take less space — space
constraints outweigh weight constraints by a huge margin), stow ability
(spherical packaging will lead to more empty spaces compared to cubical) and
volume of the goods. Different modes of transport serve different strategic
ends (rail, road, air, water etc).

o FlipKart has eKart for its logistical operations and warehousing, whereas
smaller e-commerce players generally outsource their operations to
specialized logistics players such BlueDart, DHL and now Delhivery.

The end goals differ: can either be done for end consumers or for logistical
considerations. The packaging will then depend on the end goal; form factor
plays the lead role when packaging goods for the end consumers, while
function plays the lead role in packaging for logistical operations.

It is the back-end building for storing goods. Based on the needs of the
organization, it can be in-house or outsourced.

o Primary functions of a warehouse are product movement and storage.

Activities such as offloading of the goods coming from the suppliers, the
intermediate packaging (if required), and shipping to other destinations
(retailers or end consumers) are handled in the warehouse. Similarly, they can
also serve as a storage house for handing peak consumer demand to avoid
stock out of items, and acts as a buffer between the starting point (usually
manufacturing plant) and ending point (think about a typical retail outlet).

o Different distribution strategies can be adopted by an organization based

on its needs and infrastructure in place, namely:

 Cross-Docking: Relies on minimal processing at the warehouse level and

facilitate seamless connection between “incoming” and “outgoing” goods
through technologies such as bar code scanners; becoming increasingly
important due to established structured communication between retailers
and manufacturers; best for high velocity goods with predictable demand
 Milk Runs: The delivery guy is out to deliver items from a single supplier
to multiple retailers or to pick up items from multiple suppliers for a single
retailer (An Indian Doodhwala can literally teach a thing or two about this,
hence the naming we think).

 Direct Shipping: A supplier directly ships to a particular retailer without
any intermediaries. Mostly happens with big-name stores with huge good
volumes, and very frequent replenishments. Big savings on time.
 Hub and Spoke Model: Hub serves as the central node for nearby
places, and the spokes depend on the hub for their needs (think of a
metropolitan and various tier-2 cities in its proximity).
 Pooled Distribution: Region is the most important factor driving this
strategy. Delivers to every destination point in a geographical area, smart
for handling peak time loads and LTL shipments. Plus one for the planet
as a bonus!

Human : Arteries :: Logistics : Information

Traditional paper-based information systems are increasingly on their way out,

and electronic exchanges are making rapid inroads into the logistical process
flow. The initial investment in electronic systems is recouped quickly by cost
savings due to better operational efficiency and enhanced customer service.
Advances in electronic data interchange (EDI), artificial intelligence and
wireless communication is partly responsible for this intelligent shift.

 The principal information flow can be subdivided in two main streams:

one for planning (looking into the future) and the other for operational
flows (in the past and present). Plans are to be made for production,
storage and movement of goods. Manufacturing constraints (internal)
and expected sales (external) are the key areas focused upon. Operating
flows refer to the information generated (or required) to serve the orders
to the customer.
 Enterprise Resource Planning (ERP) is a fancy term used by IT people
for one-stop, integrated packages to support multiple functions across an
organization. It serves as a central destination to capture data which aids
in making optimal decisions, while also serving as a repository to better
understand the current business scenario and plan for any future needs.

Green Supply Chain Management: Lean Practices

Green is the new way to go about things, and the myth that profits and
environment cannot go hand in hand is evaporating fast. Commitment to lean
practices is a promise to do away with inefficiencies in the system to reduce
wastes and have a minimal impact on the environment.

The emphasis on continuous product flows, standardization within the

organization/industries and a greater integration between producers and
consumers — all these have contributed to efficient supply chains with
gradually decreasing waste levels.

Information is often the key differentiator when it comes to successful supply

chain practices, and the organizations that share information with each other
based on the premise of trust and long-term business viability will often have
decisive competitive advantage over organizations that do not share critical
information upstream and downstream.

The best part is everybody winning — organizations, end consumers and

Mother Nature.


Today's leading companies are reexamining their supply chain operations,
and implementing new strategies and technology to improve performance and
enhance efficiencies.

Moving cargo in containers, or containerization, is one area of opportunity

shippers can leverage, not only in downstream transportation and logistics
functions, but also in unexpected upstream supply chain planning functions.

In its simplest application, containerization allows shippers to maximize cargo
loading efficiency by optimally building out a space while respecting
constraints such as orientation, crush factors, and stacking rules.

Containerization is especially useful for companies that move products in

varying weight categories. Heavy and light freight can be shipped together to
utilize all available container capacity, resulting in increased resource
utilization, and fewer containers required to move the same volume of goods.

In addition to configuring loads, shippers can leverage containerization in

other applications, working alone or in cooperation with other optimization
capabilities to solve problems. Here are a few ways shippers can use
containerization to drive performance and supply chain improvements:

 Take TMS to the next level. Incorporate containerization capabilities into

end-to-end transportation and logistics management to get better results
from transportation management systems (TMS). Shippers can use
containerization as part of a dynamic routing solution to ensure multi-stop
routes maximize asset utilization.

Containerization enables companies to confidently build loads that use 100

percent of available container capacity, instead of estimating and leaving a
safety buffer that results in underutilizing shipping space. The ability to ship
more merchandise in a single container facilitates the routing process, and
may enable shippers to include extra stops.

 Split distribution orders as an extension of the fulfillment

plan. Shippers can apply the containerization concept upstream in supply

chain planning by splitting distribution orders into shipments that take into
account both date constraints and inventory policies.

 Eliminate high-level capacity assumptions from order

management.Companies fulfilling customer orders frequently offer
advantageous pricing for full truckload purchases, but determining when an
order meets a legitimate full truckload is difficult without data visibility. The
common remedy is to establish an assumptive truckload threshold based
on a designated order amount, but this imprecise method means
companies often end up leaving money on the table by discounting less-
than-truckload orders. Containerization eliminates uncertainty about when
the shipment reaches the full truckload threshold.

 Optimize ocean container use. A common port scenario is a mismatch

between freight forwarder and shipper incentives. While freight forwarders
simply charge by the container, it is in a shipper's best interest to ensure
the container is full. Adding containerization capabilities to the process
ensures maximum capacity utilization.

By incorporating containerization into downstream transportation and

upstream supply chain workflows, companies can improve asset utilization,
use fewer trucks, drive fewer miles, reduce fuel costs, and enhance
distribution center operations.

Designing Supply Chain Network
Designing Supply Chain Network for each industry or business involves
arriving at a satisfactory design framework taking into all elements like
product, market, process, technology, costs, external environment and factors
and their impact besides evaluating alternate scenarios suiting your specific
business requirements. No two supply chain designs can be the same. The
network design will vary depending upon many factors including location and
whether you are looking at national, regional or global business models.

1. Supply Chain Network in Simple and basic Terms Involves

determining following process design:


 Where are your suppliers

 How will you procure raw materials and components


 Where will you locate the factories for manufacturing/assembly

 Manufacturing Methodology

Finished Good

 Where will you hold inventories, Number of Warehouses, Location

of warehouses etc.
 How will you distribute to markets - Transportation and Distribution

All above decisions are influenced and driven by Key Driver which is the
Customer Fulfillment.

2. Designing Supply Chain Network involves determining and

defining following Elements:
 Market Structure
 Demand Plotting or Estimation

 Market Segment
 Procurement Cost
 Product /Conversion Costs
 Logistics Costs including Inventory holding costs
 Over heads
 Cost of Sales
3. Network Design aims to define:
 Best fit Procurement model - Buying decision and processes- VMI,
JIT, Kanban, procurement cost models etc.
 Production processes - One or more number of plants, plant
capacity design, Building to order, build to stock etc, in-house
manufacturing or outsource manufacturing and related decisions
including technology for production.
 Manufacturing Facility design - Location, Number of factories, size
of unit, time frames for the plant setup project etc.
 Finished Goods Supply Chain network - Number of warehouses,
location & size of warehouses, inventory flow and volume
decisions, transportation.
 Sales and Marketing Decisions - Sales Channel and network
strategy, Sales pricing and promotions, order management and
fulfillment process, service delivery process definitions.

4. Network Design also examines:

 Derives cost estimates for every network element
 Examines ways to optimize costs and reduce costs
 Extrapolates cost impact over various product lines and all
possible permutations and combinations to project profitability
5. Some of the key factors that affect the supply chain network
modeling are:
 Government Policies of the Country where plants are to be
 Political climate
 Local culture, availability of skilled / unskilled human resources,
industrial relations environment, infrastructural support, energy
availability etc.
 Taxation policies, Incentives, Subsidies etc across proposed plant
location as well as tax structures in different market locations.
 Technology infrastructure status.
 Foreign investment policy, Foreign Exchange and repatriation
Policy and regulations.

Supply Chain Network designs not only provide an operating framework of the
entire business to guide the managements, they also examine the structure
from strategic view point taking into account external influences,
interdependencies of all processes and critically evaluate opportunities to
maximize profitability.

Supply Chain Design consultants use various design softwares and

optimization techniques coupled with inputs from industry consultants and


What Is a Distribution Network?

In a supply chain, a distribution network is an interconnected group of storage
facilities and transportation systems that receive inventories of goods and then
deliver them to customers. It is an intermediate point to get products from the
manufacturer to the end customer, either directly or through a retail network. A
fast and reliable distribution network is essential in today's instant gratification
society of consumers.

[Important: Distribution networks come at the post-manufacturing part

of a supply chain—the flow of goods and services and includes all
processes that transform raw materials into final products and into the
hands of consumers.]

Understanding Distribution Networks

The supply chain for goods can involve a far-reaching distribution network
depending on the product and where the end customers are located. A
manufacturer may have a distribution network to serve wholesalers, who in
turn have their own network to ship to distribution networks operated by
retailers, who at the last link of the supply chain would sell the goods in their
retail stores.

Alternatively, a simplified supply chain could involve a manufacturer shipping

finished products to its distribution network and then directly to end

Location (proximity to the customer) and infrastructure quality are important
attributes of a distribution network. Additionally, the storage, handling and
transportation functions at a distribution site are set up to suit the particular
needs of the company to serve its customer base in a geographic area. There
can be a high level of sophistication at a single site—and by extension, the
entire distribution network—to optimally process order flow of finished goods,
whether a handful of large items such as farm tractors or thousands
of SKUs for a retail chain.

For the entire distribution network, a company must plan out needs for
equipment, workers, information technology systems and transportation fleets.
The company must determine whether a hub-and-spoke distribution network
is right for its business or a decentralized network.

Key Takeaways

 In a supply chain, a distribution network is an interconnected group of

storage facilities and transportation systems that receive inventories of
goods and then deliver them to customers.
 It is an intermediate point to get products from the manufacturer to the
end customer, either directly or through a retail network.
 A fast and reliable distribution network is essential in today's instant
gratification society of consumers.

Example of a Distribution Network

Establishing an effective distribution network requires a studied approach
because it is increasingly considered a critical asset in this new age of e-
commerce. Walmart, for example, with 147 distribution facilities at the end of
its fiscal year 2017, is allocating more capital to build out additional fulfillment
centers for its distribution network as it evolves with the competitive demands
of the market.

Amazon has also increased its distribution network, building out enormous
robotically-controlled warehouses across the world and operating its own
freight trucking fleets and cargo planes. Amazon has even discussed using
autonomous drones to deliver goods to customers, which would be an
innovation in the distribution of goods.

Distribution Network Strategy and Optimization
Products companies need to periodically re-think where products are
produced and how they are physically distributed – even when it’s not obvious
that economics have changed. We help clients with all the steps in the

 Conceptualize better manufacturing and distribution network approaches for

their businesses. Usually this is the most critical and difficult step – creating
better ideas! Knowing how other businesses have restructured their
networks – both in your industry and in other industries – can help.
 Model the economics of alternative networks – often it’s not practical for
clients to maintain the skills in-house for this kind of work. We have done
these analyses, using various modeling software tools, many times.
 Right-size inventory. What are the right inventories to have in which
locations? Should we go with a different mix?
 Plan implementation. Which network changes are actually worth
implementing – not all improvements will actually be worth making disruptive
and expensive changes. Which are the highest priority and should be
implemented first, versus other changes that can be deferred?


Have you ever considered the best way to identify strengths and weaknesses
in your company’s supply chain management? Or, have you focused on how
to prioritize opportunities in improving supply chain components? For supply
chain managers, it can be challenging to set a market strategy and tactical
goals because there could be too much information that is poorly organized or
has no reference points. This is where benchmarking comes into play.
Benchmarking measures the performance of the company’s supply chain by
considering quantity, value and time. Benchmarking formulates a tangible
measure of the efficiency of main processes in the supply chain and serves to
create a solid foundation of an organization’s performance. It also measures

the impact of each improvement made by managers subject to proper
measurement indicators.

Based on different purposes and outcomes, benchmarking can be divided into

qualitative and quantitative.

Qualitative benchmarking uses the best practices of competitors or similar

organizations and their data on successful techniques for improving supply
chain performance. It analyzes differences in strategies and practices in
order to find fitting opportunities.
Quantitative benchmarking consists of KPIs (key performance indicators),
estimation and analysis. Business metrics such as inventory turnover,
revenue, and profit are usually used – however, any custom KPI could work.
Quantitative benchmarking examines the supply chain by gathering data on
performance and not practice.
After data and standards are projected, one can note which processes should
be improved. Main areas for benchmarking and improving supply chain
management are:

 productivity
 warehouse management and inventory accuracy
 shipping/receiving accuracy
 storage density
 quality control

There are several levels of benchmarking:

1) Internal – benchmarking on a tactical level with the main focus on
operations. It allows companies with multiple facilities, divisions or branches to
compare and contrast the ways in which processes perform. For example,
compare three different warehouses within one organization.
2) External – deliberate level of benchmarking that takes a company outside
its own industry and exposes it to different methods and techniques. This type
of benchmarking often requires hiring a consulting firm to perform proper
3) Competitive – compares a company’s operational performance against
competitors’. Obviously, it is unlikely for competitors to share their specific
knowledge on best industry practices, so using industry-standard metrics
could be an option.

Benchmarking the supply chain helps organizations determine their relevant
performance and amend operations to stay competitive. Although the process
of benchmarking could consume a lot of time, effort and resources, it provides
a company with unique knowledge on business activity, perspectives,
opportunities and weaknesses.


The Balanced Scorecard Methodology for Supply

Chain Performance Measurement
A common performance management mistake made by supply chain
operators, is trying to maintain and monitor too many KPIs. This can easily
lead to the condition that’s sometimes known as analysis paralysis. If you are
just starting out with the implementation of KPIs and want to avoid this
particular pitfall, you might consider utilizing the “balanced scorecard”
methodology, developed in the 1990s by Robert Kaplan and David Norton.

What is the Balanced Scorecard Methodology?

Kaplan and Norton’s balanced scorecard was not specifically intended for use
in supply chain. However, this model of performance measurement has
proven to be of value in just about every industry imaginable. In fact today, the
balanced scorecard methodology has evolved beyond use as a measurement
tool into a full-blown operational management model.
That doesn’t mean you can’t simply apply the measurement aspect of the
balanced scorecard though. The methodology is ideal as a framework for
companies new to the implementation of KPI dashboards.
In the balanced scorecard model, four sets of KPIs are linked to the strategic
objectives of an organization. The four areas targeted are:
 Financial performance
 Customer service
 Internal business process
 Education and learning/training.
In case you’re wondering what the balanced part means, it’s the fact that
rather than just measuring financials, (which is what a lot of companies were

doing prior to the development of the balanced scorecard concept), the three
other quadrants of the scorecard focus on measuring the non-financial
aspects of a business operation.
Monitoring these other operational elements is important because financial
indicators tend to offer a delayed view of performance. By measuring the other
three areas, you will see problems much sooner. Therefore you can address
the issues before they impact your organization financially.

The Balanced Scorecard: Worth a Closer Look

The balanced scorecard methodology comprises a lot more than can be
detailed in this short blog post. Suffice to say though, if you’re concerned
about setting up a KPI structure providing meaningful measurements, without
overwhelming you and your team with data, you should certainly take time to
explore this particular management model in more detail.